2013 Morning Exam Question 8 Part B

1. the case states it is using classical immunization but it is a portfolio of bonds to fund long term liabilities. Shouldn’t that be multiple liability since there is more than one liability?

2. PVA and PVL are given already with 400 million. Why would the immunization rate be different from discount rate? In part B, it uses two rates to calculate the new PVL. How is that new PVL different from the old one?

Thank you!

1. I believe multiple liability immunization is simply an extension of “classical” single period immunization. I’m not sure why this stood out to you in the case though. It’s really not relevant to answering any of the questions.

2. You really should re-read the section on contingent immunization. It’s super important and I’d bet dollars to donuts there’s a question about it on our exam, possibly requiring the calculation of the safety margin like in this question. Knowing what the two rates are and how to use them is key to getting this question correct.

The discount rate is determined by actuaries. You can think of this as the return on the portfolio that is required to meet liabilities. The immunization rate is the expected return on plan assets. If the expected return is higher than the required return, contingent immunization can be employed. However, if conditions change and this is no longer the case, active management must stop and the portfolio has to be immunized again.

Thanks, JayWill!

I am just trying to understand every sentence in the cases. That is why.

That section and Derivatives are the ones I am working on this week. Thanks again!

No worries! Sorry if my comments sounded harsh. I get that way sometimes when I’m tired and cranky, which is pretty much all the time lately LOL. All the best on your studies.

All good! You are right. I do need to work on that section.

I just had 4 day weekend studying 10+ hours each day because I can only take one more day off before the test. I think I hit my body capacity today both physically and mentally. Hope everything we are doing will pay off

Good luck to you as well and thanks all your help!