Contingent Immunization - Book 4 Page 37

“If the manager invests entire $500M in 4.75%, 10 Year Notes at Par and the YTM immediately changes what happens to the dollar safety margin?” If the YTM suddenly drops to 3.75%, the value of the portfolio will be $541.36M" Where are they coming up with $541.36M?

I got it - thanks guys. Mind blank.

I have the same question. Can anyone help me?

If the yield drops, the market value (present value) of the bond increases. As the present value of assets has increased relative to the present value of your liabilities, the dollar safety margin has increased. That assumes that the same factor that caused the bond yield change will not affect the liability in the same way.

yes, can someone tell us how the $541.36 is calculated?

Don’t have the books, but the 541.36 in question appears to me to be a PV calc. N = 20 I = 3.75 / 2 = 1.875 PMT = 500MM * .0475 = 23,750,000 / 2 = 11,875,000 FV = 500MM PV = ? PV = 541,376,014 Not sure why it’s 541.36, as opposed to 541.38. Also, I agree with soddy’s analysis above on what would happen to the dollar safety margin.