Contingent Immunization

CFA Level III
#1

True or false, contingent immunization can only be used with zero coupon bonds. Go.

#2

False. I win.

#3

False but it works best with zero coupon bonds.

#4

False, but best strategy when ZCB are deployed in the strategy as there is no reinvestment/immunization risk.

#5

Name an instance when zero coupon bonds are not the best strategy for immunizing a portfolio.

#6

When duration of liabilities do not match the duration of the assets (in multiple liabilities)

#7

cfaboston28 Wrote: ------------------------------------------------------- > When duration of liabilities do not match the > duration of the assets (in multiple liabilities) I’ll give you partial credit on that one. Even in multiple liability immunization, the aggregate durations and the PVs (of both L and A) must match. The caveat is that the RANGE of your assets must be wider than the range of your liabilities.

#8

I never really got that point (the range of durations things). Schweser says that this is necessary to be able to use cash flows generated from the assets to meet the liabilities. I understand why a duration range that is lesser than the one from the liabilities does not permit to immunize the ptf. Buy why do you need to be larger? Shouldn’t simply having an an equal range work? Thanks for the clarifications. J.

#9

if you have bonds that mature on the same day as your liabilities, you wont be able to pay off your liabilities…you need some liquidity/cash on hand before the liabilities mature so that you can pay them off. therefore, the assets have to have a wider maturity range.

#10

That’s how I interpreted it also. It confirms what I thought. Thx Willispierre! J.

#11

I think its also worth noting the range is wider because you are battling immunization risk (which is made up of price risk and reinvestment risk) You hedge reinvestment risk with issues that are longer than the liability due. You hedge price risk with the issues that mature before the liability due.

#12

please correct me but i thought immunization risk = reinvestment risk, and NOT price risk. Immunization in fact takes care of price risk.