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A small pension fund has the following liabilities (in million dollars): Year 1 Year 4 Year 6 Year 2 26 Year 3 28 Year 5

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A small pension fund has the following liabilities (in million dollars): Year 1 Year 4 Year 6 Year 2 26 Year 3 28 Year 5 26 Year 7 32 Year 8 33 Year 9 34 24 28 29 It would like to construct a dedicated bond portfolio. The bonds available for purchase are the following: Price Coupon Maturity Bond1 102.44 5.625 Year 1 Bond2 99.95 4.75 Year 2 Bond3 100.02 4.25 Year 2 Bond4 102.66 5.25 Year 3 Bond5 87.90 0.00 Year 3 Bond6 85.43 0.00 Year 4 Bond 83.42 0.00 Year 5 Bond8 103.82 5.75 Year 5 Bond9 Price 110.29 Coupon 6.875 Maturity Year 6 Bond10 108.85 6.5 Year 6 Bond11 109.95 6.625 Year 7 Bond12 107.36 6.125 Bond13 104.62 5.625 Year 8 Bond14 Bond15 Bond16 99.07 103.78 64.66 4.75 5.5 0.00 Year 8 Year 9 Year 9 Year 7 All the bonds have a face value of $100 (i.e., sold for $100 at the end of maturity year). Formulate an LP that minimizes the cost of the dedicated portfolio, assuming a 2% reinvestment rate. Define the decision variables clearly

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