Fixed Income Past II EOC

[archived_user]

Hi
Can someone shed some light on EOC 14 and 27 fixed income part II
EOC 14: why we divide dollar duration with $100m and not $125m? the question asks the sample leverage portfolio and not equity portfolio?
EOC 27: why contingent claim risk? in the text ….standard immunization approach with noncallable bonds
thanks

 

[archived_user]

q 14: you need to calculate the impact on the equity in the portfolio – which is 100M.
q 27: Is asked every year as a doubt. In spite of the portfolio being immunized with non-callable bonds - there is contingent claim risk. The non-callable bonds are the assets (used to defease) being set aside for immunizing the portfolio. Portfolio itself is funding liabilities for the new wing of the hospital - and as such would have cap risk, contingent claim risk and interest rate risk - so that part is true.