Contingent Immunization: Q

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tulkuu

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A portfolio manager has decided to pursue a contingent immunization strategy over a four-year time horizon. He just purchased at par $26 million worth of 6% semiannual coupon, 8-year bonds. Current rates of return for immunized strategies are 6% and the portfolio manager is willing to accept a return of 5%. Given that the required terminal value is $31,678,475, and if the immunized rates rise to 7% immediately, which of the following is most accurate? The dollar safety margin is:
A) negative (-$1,423,980) and the portfolio manager must switch to immunization.
B) positive ($6,158,602) and the portfolio manager can continue with contingent immunization.
C) positive ($370,765) and the portfolio manager can continue with contingent immunization
Why isn’t my number(606,942) matching any?
 
OP, you didn’t use the terminal value they give you
or
you forget to discount your required amount using the new rate
or
you forget revalue your bond portfolio using the new I/Y
 
Here is my computation, please correct me.
Terminal value: 31,367,475
1, After the immunization rate rises to 7%.
Asset required: 31,367,475/(1+7%/2)^8=23,820,823.
To calculate the PV of the bond:
FV=26m
PMT=26mm*6%/2=0.78m,
n=16
I/Y=7%/2=3.5%
PV=24,427,765
2 Dollar safety marging: 24,427,765-23,820,823=606,942.
 
passme, you are correct. I don’t know why I didn’t use 31,678,475…This happens once in a while – transcription error:(
 
24427765 is even what I got for the portfolio when the rates rise.
But why is your terminal value different. I just used the required terminal value and discounted it by 3.5 for 8 semiannual periods and got 24057000.
Hence the difference is 370765, the dollar safety margin.
 
you know what. thats what i would do too.
this question is just a battery waster..lol
it is cursed.
 
tulkuu wrote:
Here is my computation, please correct me.
Terminal value: 31,367,475
1, After the immunization rate rises to 7%.
Asset required: 31,367,475/(1+7%/2)^8=23,820,823.
Click to expand...
if N = 16. how does that make sense?
 
4-year time horizon.
16 is from the 8-year bond.
 
A portfolio manager has decided to pursue a contingent immunization strategy over a four-year time horizon. He just purchased at par $26 million worth of 6% semiannual coupon, 8-year bonds. Current rates of return for immunized strategies are 6% and the portfolio manager is willing to accept a return of 5%. Given that the required terminal value is $31,678,475, and if the immunized rates rise to 7% immediately, which of the following is most accurate? The dollar safety margin is:
A) negative (-$1,423,980) and the portfolio manager must switch to immunization.
B) positive ($6,158,602) and the portfolio manager can continue with contingent immunization.
C) positive ($370,765) and the portfolio manager can continue with contingent immunization
  • PV(Liability Required) = 31,678,475/(1.035)^8 = 24,057,000
  • PV(Assets Available)
  • PV=?
  • FV=26,000,000
  • PMT=780,000
  • N=16
  • I/Y=3.5
  • CPT PV=24,427,765
Cushion = 24,427,765 - 24,057,000 = 370,765
C) positive ($370,765) and the portfolio manager can continue with contingent immunization
 
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