i thought i had this topic nailed, but i’ve got a Boston Society Mock question that’s got me all worked up! It asks for the required terminal value:

cushion spread: 1.5%, safety net return 4%, required initial portfolio amount $279m, time horizon 2 years

i thought the terminal value is the FV liability at the required return ie.279m * (1+(0.04/2))^4 = 301.9, but the solution uses the cushion rate of 5.5% per annum i.e. 279 * (1+(0.055/2))^4 = 311m. I thought the liability is calculated based on the safety net rate of return, rather than the immunized rate.

Cushion spread = Immunization rate - Safety return on portfolio. If cushion spread is given and is 1,5 % if safety return is 4%, than immunization rate is 5,5%.

To calculate TV you first have compound initial amount with safety return and then discount back by immunization rate to get PVL.

I don’t remember for Boston society case but the second equation looks like an error, 301.9 should be discounted by immunization rate and such steps are required in each official material question.