AUF has been directed to pursue a contingent immunization strategy for a portfolio MV $100. Trustees not wiling to accept below 6% return for 5 years the length of time when liability must be paid. Trustees stated that belive an immunization rate of 8% is attainable in today’s market. Portfolio manager has decided to implement this strategy by purchasing $100 mil in 10 years bonds with an annual coupon bond of 8% semiannually
Assuming an immediate (today) increase in the immunized rate to 11%, the portfolio reuired return that would most likely make Price turn to an immunization strategy is closest to:
it was needed to know that 100 Mill in bonds were invested to start with. Otherwise you could not have known that. And that 100 Mill was used in the 2nd step.
Seems mcap11’s answer is correct (11.7%) since this is a semiannual bond. Further in the absence of infromation, i auume all 100 initially invested in the bond.
it is only missing the word “paid” before semi-annually. Also, you know 100 is invested in the bond because its an 8% bond when rates are 8%, so it’s par.