Immunization Strategy

[pokhim]

Hi, I’m just trying to knuckle down a couple of key points. When calculating the safety net on a contingent immunization i’m confused as to which interest rates i need to use when I calc the TV and the PV of the asset and the which rate I need to use to calc the PV of the bond… Is the below correct?
TV = PV(of bond) * (1+x)^n where x=acceptable rate
Then PV of the TV i.e. PV = TV/(1+x)^n where x = immunized rate
Then calc the PV of the bond using the immunized rated…
Where does the new rate come in..i.e. when rates change immediately after..?
thanks

 

[Galli]

Im not clear on the actual question but the immunization rate is the rate in which the PV of the liability matches the PV of the asset.
The X = acceptable rate is the return in which you believe you can achieve in the market
This means the asset will grow from today’s $ to the future value of said assets $ amount. This is what you can reasonably expect to have in your possession when the liability comes due.
———————————————————————————————————————————————
“Then PV of the TV i.e. PV = TV/(1+x)^n where x = immunized rate”
This is just saying your future $ asset is worth x today. This ‘x’ value of worth today should match your $ of liability. Said differently, this is the amount of liability you can have today which is satisified by your assets.