Buzzwords in Contingent Immunization

CFA Level III
#1

This is my collection, please correct me if I’m wrong.

1, Immunization target rate of return = current immunized rate of return = current market interest rate.

* Immunization rate = YTM of the portfolio (2011 mock exam, Q31) * Immunization target rate of return is NOT YTM (Volume 4, page 32, example 8)

2, Safety net return = required rate of return (2011 mock exam, Q31) 3, Cushion spread 4, Dollar safety margin 5, The yield is BEY, if not specified.

Please add more if I miss anything. Thanks.

#2

you are cute

#3

“contingent immunization requires the prevailing immunized rate of return to exceed the required rate of return”

is this correct? if so, why?

#4

Required Rate of return = Safety Net Rate of return.

When Immunized Rate of Return > Required Rate of return - you have a positive Safety cushion - and can do active management in that space.

#5

Can someone provide an full example on contigent immunization which needs N, PV, YTM, Fv, PMT on calc?

thanks…

#6

Here is a contingent immunization question I have:

If you take a look at the Schweser Example in Book 3 Page 33, the safety return is 8% and the immunization rate is 9%. So I take this to mean that your cushion spread is 1% and you can manage actively at any rate of return until the active return goes down to 8% (so even at 8.2% you can manage actively).

At 8% you stop and manage passively.

So when you change to passive managment, is the implication that you then start to earn the 9% immunization rate? Or is it the safety return of 8%? Schweser seems to be inconsistent:

Page 33: “If the portfolio return declines to the safety net return, the immunization mode is triggered to lock in the SAFETY NET RETURN.” ----> 8%

Page 35: “There may be a lack of assurance that the IMMUNIZATION RATE will be achieved once the immunization rate is activated.” ----> 9%