LeBeau states, “Given a parallel shift in the market yield curve, although the reinvestment risk of Portfolio A is greater than that of the single 8-year liability, the reinvestment risk is offset by the fact that interest rate (price) risk of Portfolio A is less than the single 8-year liability.” Peter Newkirk, a board member, asks LeBeau, “Given a one-time instantaneous yield curve shift with short-term rates (maturities of 6 years or less) rising and long-term rates (maturities of 10 years or greater) falling, then: Question 1: Which portfolio possesses the highest level of immunization risk? Question 2: Which portfolio would realize the largest difference between the values at the end of the investment horizon and the target accumulated value (the required payoff of the single, 8-year liability)?” LeBeau’s most appropriate responses to NewKirk’s questions are: Question #1 Question #2 A. Portfolio A Portfolio A B. Portfolio A Portfolio B C. Portfolio B Portfolio A D. Portfolio B Portfolio B The answer given is D. My question- is if Portfolio B -will have higher terminal value- how does it have higher immunization risk. Granted that Barbell portfolios- have higher re-invstmt & price risk- but in given circumstances- doesnt B have lower risk

Was B a Barbell portfolio? And A a Bullet?

this question is poorly worded or is incomplete

harish 55 Wrote: ------------------------------------------------------- > LeBeau states, “Given a parallel shift in the > market yield curve, although the reinvestment risk > of Portfolio A is greater than that of the single > 8-year liability, the reinvestment risk is offset > by the fact that interest rate (price) risk of > Portfolio A is less than the single 8-year > liability.” > > Peter Newkirk, a board member, asks LeBeau, “Given > a one-time instantaneous yield curve shift with > short-term rates (maturities of 6 years or less) > rising and long-term rates (maturities of 10 years > or greater) falling, then: > > Question 1: Which portfolio possesses the highest > level of immunization risk? > > Question 2: Which portfolio would realize the > largest difference between the values at the end > of the investment horizon and the target > accumulated value (the required payoff of the > single, 8-year liability)?” > > LeBeau’s most appropriate responses to NewKirk’s > questions are: > > Question #1 Question #2 > A. Portfolio A Portfolio A > B. Portfolio A Portfolio B > C. Portfolio B Portfolio A > D. Portfolio B Portfolio B > > The answer given is D. My question- is if > Portfolio B -will have higher terminal value- how > does it have higher immunization risk. Granted > that Barbell portfolios- have higher re-invstmt & > price risk- but in given circumstances- doesnt B > have lower risk I thought it was D because its higher duration implies that it also has higher immunization risk. When rates rise, its value has a greater chance of falling below the safety margin.

Bigwilly- These are the details of Portfolio A & B. Sorry for missing out in the earlier question Portfolio A is composed of 6-year and 10-year maturity, option-free, zero-coupon, U.S. Treasury bonds. Portfolio B is composed of 4-year and 15-year maturity, option-free, coupon-bearing U.S. Treasury bonds.

Harish, it’s the coupons in Portfolio B that would increase the immunization risk for Port B. Not sure if I understand your question.

That’s right I remember this question. Portfolio B’s cash flows are more dispersed around the time horizon and are coupon bearing and thus have a higher reinvestmetn risk. Also they have a higher price risk because they are Coupon bearing vs zero-coupon.

which exam is this? The second paid sample exam? - sticky harish 55 Wrote: ------------------------------------------------------- > LeBeau states, “Given a parallel shift in the > market yield curve, although the reinvestment risk > of Portfolio A is greater than that of the single > 8-year liability, the reinvestment risk is offset > by the fact that interest rate (price) risk of > Portfolio A is less than the single 8-year > liability.” > > Peter Newkirk, a board member, asks LeBeau, “Given > a one-time instantaneous yield curve shift with > short-term rates (maturities of 6 years or less) > rising and long-term rates (maturities of 10 years > or greater) falling, then: > > Question 1: Which portfolio possesses the highest > level of immunization risk? > > Question 2: Which portfolio would realize the > largest difference between the values at the end > of the investment horizon and the target > accumulated value (the required payoff of the > single, 8-year liability)?” > > LeBeau’s most appropriate responses to NewKirk’s > questions are: > > Question #1 Question #2 > A. Portfolio A Portfolio A > B. Portfolio A Portfolio B > C. Portfolio B Portfolio A > D. Portfolio B Portfolio B > > The answer given is D. My question- is if > Portfolio B -will have higher terminal value- how > does it have higher immunization risk. Granted > that Barbell portfolios- have higher re-invstmt & > price risk- but in given circumstances- doesnt B > have lower risk