just wanna double check…i think schweser messed this one up big time…what answer are you guys getting? (and it doesn’t have to be an A B C D either)… A portfolio manager has decided to pursue a contingent immunization strategy over a four-year time horizon. He just purchased at par $26 million worth of 6% semiannual coupon, 8-year bonds. Current rates of return for immunized strategies are 6% and the portfolio manager is willing to accept a return of 5%. Given that the required terminal value is $31,678,475, and if the immunized rates rise to 7% immediately, which of the following is most accurate? The dollar safety margin is: A) positive ($6,158,602) and the portfolio manager can continue with contingent immunization. B) positive ($6,158,602) and the portfolio manager must switch to immunization. C) negative (-$1,423,980) and the portfolio manager must switch to immunization. D) negative (-$1,423,980) and the portfolio manager can continue with contingent immunization

Safety margin is a positive 370,764.82 and should not immunization assuming there term val is correct.

^agree, that’s what i got as well. i was certain that Schweser facked up.

required val=31,678,475/1.035^8=24,057,000 bonds are worth N=16 I=3.5 Pmt=780,000 fv 26,000,000 =24,427,764.81

^as i said, that’s what i got. I agree with you. schweser’s answers for some reason used a N=16 for the present value of the required terminal value, which i knew had to be wrong. but i wante dto eliminate my doubt since we’re close to the exam!

Nice I think I finally got this down, what was schweser’s answer and calcs?

strikershank Wrote: ------------------------------------------------------- > ^as i said, that’s what i got. I agree with you. > > schweser’s answers for some reason used a N=16 for > the present value of the required terminal value, > which i knew had to be wrong. > > but i wante dto eliminate my doubt since we’re > close to the exam! Wait they used 16 to discount the term val back? That’s completely wrong, they wanted to immunize for 4 yrs, should use 8.

Terminal Value is in 8 years = 16 periods = PV of 18,269,164 Bonds have 8 years left also = 16 periods = PV of 24,427,765 Difference of 6,158,601 so A. I dont have Schweser so is this right?

no - because the contingent immunization strategy is for four years, not 8…the bonds purhcased mature in 8 years…but that doesn’t matter. What matters it he immunization period (4 years!).

…

What’s the answer from Schweser?

yes he only wants to immunize for 4 years so you discount the term val by that (8 yrs).

schweser said the answer is but i think they screwed up by using N=16 for the terminal value part. The correct answer was A) positive ($6,158,602) and the portfolio manager can continue with contingent immunization. We are given the required terminal value of $31,678,475. Next, we calculate the current value of the bond portfolio: PMT = ($26,000,000)(0.03) = $780,000; N = 16; I/Y = 7/2 = 3.5%; and FV = $26,000,000; CPT ¨ PV = $24,427,765. Next, compute the present value of the required terminal value at the new interest rate: FV = $31,678,475; PMT = 0; N = 16; I/Y = 7/2 = 3.5%; CPT ¨ PV = $18,269,163. The dollar safety margin is positive ($24,427,765 - $18,269,163 = $6,158,602) and the manager can continue to employ contingent immunization. --------------------------------------------------------------------------------

.

So I guess I was right Accordign to Schweser…

no, with the terminal value you don’t keep the interest rate the same and yes, according to schweser you are correct. According to me (and Dino), i think you’re both wrong:) But i mean that in a nice way!, haha.

Striker…I deleted that post about Interest rates… I was fishing for a differetn answer and strange thoughts were coming into my head

we’re on the same page now?

Yes, if thats the page on I’M CORRECT

oh, you’re not correct, lol… i’m 99% sure scheweser screwed up this question. Where’s CSK??? what’s he think? or other people on this board to bring hte sample size up??