# Contingent immunization

If you look at the example on p. 33 (Book 3) in Schweser (question 3) and question 17 on p.46 in the concept checkers, both questions essentially ask the same thing but Schweser answers each question differently. What process should we use? If I used the same process for the question on p.47 as they did for the one on p. 33, I get 100M not 122M, which means the margin is negative instead of positive. Anyone else had trouble with those questions?

can you explain more where you’re hung up - i’ve looked and both answers make sense to me…

Striker, I am flipping to the pages and looking for answers. Yeah, what is causing your confusion???

Look at the way they found the answer in question 3 on page 33. rates went to 12%. the PV of the bond is now 15,870,551. The assets required is 17,839,999. Portfolio is less than assets required, therefore immunize. now go to example 17 on page 46. rates go to 8%. using the same steps as on page 33, the PV of the bond is FV=100M, I/Y= 4%, N=50 years, PMT=100m*4%= 4M, therefore PV is 100M. The PV in the answer is 122,333,000. They calculated the PV for a similar problem differently.

you’re forgetting in the question 17 on page 46 the number of bonds you own. they are valued at par now, but you own 122,333 bonds…and that makes your PV of your bond portfolio equal to \$122mln. they calculated PV the same, just in question 17 you know you invested \$100mln dollars in NON PAR bonds so you purchased a number of bonds (122,333 as it turns out) and then in question 17 these bonds move to par. Whats the value of your portfolio? its up as you purchased 8.5% bonds priced to yield 10%…

I don’t have the problem in front of me…however, I remember that problem. Read closly, the problem said the PM wanted to buy 100M worth of bond, he initally bought them at discount, now the rate went up to 8%, therefore those bond value appreciated. When he bought \$100M worth of bonds, the problem was figuring out how many bonds he actually bought. Helps??

Read the question carefully. In the second question they bought the bonds at the discount so they don’t have \$100,000,000 par of the bond, they have \$122,333,000 par. Why? Because it cost they ~83 cents to the dollar to buy them.

Striker beat me again.

So the missing word in the second question is “at par”? That’s easy to overlook in the heat of an exam.

The funny thing about this Contingent Immunization I’ve gone over the example a wack of times and done questions on it till I’m blue in the face, and today I read the god damn LOS and the command word is “discuss” So the odds of having to do these calculations are very slim at best unless they don’t follow their own command words.

former trader Wrote: ------------------------------------------------------- > So the missing word in the second question is “at > par”? That’s easy to overlook in the heat of an > exam. Your confusion comes from the fact that the bond in p.46 actually increases from total amount of \$100 mill (which confusingly LOOKS LIKE something par but the underlying bond is actually priced below par at \$81.7444) to \$122.33 mill (with the underlying bond price at par). So, no, I won’t say “par” is the thing you are looking for. Correct calculation of the total value of the bond before and after change in interest rate (drop from 10% to 8% for p.46) is the key thing. Hope this helps. - sticky

if rates suddenly change (ex: from 8% to 10%), do we assume that the immunization rate also increases to 10%?

strikershank Wrote: ------------------------------------------------------- > you’re forgetting in the question 17 on page 46 > the number of bonds you own. they are valued at > par now, but you own 122,333 bonds…and that > makes your PV of your bond portfolio equal to > \$122mln. > > they calculated PV the same, just in question 17 > you know you invested \$100mln dollars in NON PAR > bonds so you purchased a number of bonds (122,333 > as it turns out) and then in question 17 these > bonds move to par. Whats the value of your > portfolio? its up as you purchased 8.5% bonds > priced to yield 10%… ^ Agree to the above… got caught on thise twice… won’t happen again.