 # 2010 AM Session - Ques 6 (A) - FI Section (should i receive marks?)

I approached this question by equating the weighted average of duration of assets & liabilites.

Since liability has a duration of 4 years. I took the current wt in the portfolio then determined the remaining funds in hand (69,640,000- current value of already invested govt. bonds) so 15,268,200 was the amount left to invested in bonds in question i.e. weight of 21.93%*.

I found the modified duration of bond A & B which was 1.94 & 7.06 (as calculated in guidelines answer) & as per their weight found out the Wt duration of govt bonds

= 1.94 x 35.26% (weight of A) + 7.06 x 42.81 (weight of B)

= 3.70 so only 0.30 was left to be immunized.

Only Bond X which has a Mod duration of 1.33 can give me weighted avg duration of = 0.29 (1.33 x 21.93%*)

Ok now the guidelines approached this question was equating the dollar duration. However the ans was same i.e choosing Bond X.

MY QUES: Was my approach right & shall i receive credits?

the guideline answer has two solutions… if you see.

1 is your approach. - they call it the modified duration approach and it is on pg 46 of the answer key.

the other is the \$ duration approach. which is on pg 45.

I just realized they have shown both methods. Thnx CPK for pointing out the soln on p.no 46