Couple more

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.


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…