Schweser Book 3, Pg.158. 5) Could somee pls. go through this question and explain the answer to me? It’s a bit long, so I am not posting it. But I’ll let you know my specific issue with it, after I go through your explanation. 17 on pg.160). This is about immunization strategy. I am having difficulty with schweser’s explanation. They start explaning it by using no. of shares and stuff. I didn’t any explaination of implementation shortfall using no. of shares. Could someone go through this and help me out? Thanks once again.
Any1???
Is this the one with weird number of shares? I am using 2008-
Yea…its got no. of shares in the calculation…could you pls. post the 2008 solution if u dont mind?
Do you mind posting the first line so that I know we are on the same q?
First line of question 17) If interest rates fall to 8% immediately after the purchase of this bond, is immunization necessary? First line of answer 17) You initially purchased 122,333 bonds at individual prices of $817.44…
Which part of q you have problem with ?
Question 17, initially you purchase the bonds yielding at 10% and they are valued at $817,440,000 (approx). Then the interest rate falls to 8% and value of the bonds is $100,000,000. (becuz coupon is also 8%). Value of the initial value of the assets necessary to achieve the required terminal value is now $102,92,000 (from $91,757,416 in question 15). This is becuz I divided the terminal value of $164,783,136 (from q.14) by 8% (the new interest rate). If we now compare, required terminal value now > that value of portfolio, and thus, dollar safety margin now negative, and leading to switch to immunization. The above is what I did. Schweser answer uses some no. of shares in the bond calculation, and comes up with a new value of portfolio of $122,333,000. (I guess they are multiplying 122,333 shares with $100,000,000). This is where I am confused. What is this they are doing? To put it simply, I am not getting their explanation.
I had the same problem. If you glance at the first line, you will know why. My explanation: Initially, the bonds are valued at 817.44 per 1000 face value. We had 100 MM to invest. At this point, the bond was selling at 817.44, so we effectively bought 10,000,000/817.44 = 12,233.3138 bonds. The remaining calcs should fall into place. If not, let me know.
hmmm…wow…that makes a lot of sense…thanks a lot man !!!
You are very welcome. Maybe you can help me with a q later on right !!!
hmmm…wow…that makes a lot of sense…thanks a lot man !!!
oops…dont kno how that happend…