A portfolio manager has decided to pursue a contingent immunization strategy over a four-year time horizon. He just purchased at par $26 million worth of 6% semiannual coupon, 8-year bonds. Current rates of return for immunized strategies are 6% and the portfolio manager is willing to accept a return of 5%. Given that the required terminal value is $31,678,475, and if the immunized rates rise to 7% immediately, which of the following is most accurate? The dollar safety margin is:
A) negative (-$1,423,980) and the portfolio manager must switch to immunization. B) positive ($6,158,602) and the portfolio manager can continue with contingent immunization. C) positive ($370,765) and the portfolio manager can continue with contingent immunization
24427765 is even what I got for the portfolio when the rates rise. But why is your terminal value different. I just used the required terminal value and discounted it by 3.5 for 8 semiannual periods and got 24057000. Hence the difference is 370765, the dollar safety margin.
A portfolio manager has decided to pursue a contingent immunization strategy over a four-year time horizon. He just purchased at par $26 million worth of 6% semiannual coupon, 8-year bonds. Current rates of return for immunized strategies are 6% and the portfolio manager is willing to accept a return of 5%. Given that the required terminal value is $31,678,475, and if the immunized rates rise to 7% immediately, which of the following is most accurate? The dollar safety margin is:
A) negative (-$1,423,980) and the portfolio manager must switch to immunization. B) positive ($6,158,602) and the portfolio manager can continue with contingent immunization. C) positive ($370,765) and the portfolio manager can continue with contingent immunization