AMA Wrote: will remain unchanged (as it was at > T=0) in 3 years. > > The 1st coupon payment of $10 can be reinvested at > the forward rate of 12.06% > {=[(1.10^3/1.06)]^1/2]-1} for 2 years and the 2nd > coupon payment can be reinvested at the forward > rate of 14.11% {=[(1.10^3/1.08^2)]-1} for 1 year. > I think what is incorrect here is that you should calculate the forward rates using the Treasury Spot rate curve, not the Yield Curve. When it says yield curve, it represent the YTMS (or IRRs) of available T. securities of differing maturities. So, say today the YTM of a 3 year 10% coupon bond is 10%, then you should compare this 10% to the YTM of 2 year 10% coupon bond of next year, which will be lower in case of an upward sloped Yield Curve today (assuming pure expectations theory holds)
good gravy this is still going? i picked the wrong week to quit crystal meth
AMA is trying to proof every CFA formula.
revisor Wrote: ------------------------------------------------------- > AMA Wrote: > will remain unchanged (as it was at T=0) in 3 years. The 1st coupon payment of $10 can > be reinvested at the forward rate of 12.06% {=[(1.10^3/1.06)]^1/2]-1} for 2 years and > the 2nd coupon payment can be reinvested at the forward rate of 14.11% {= > [(1.10^3/1.08^2)]-1} for 1 year. > > I think what is incorrect here is that you should calculate the forward rates using the > Treasury Spot rate curve, not the Yield Curve. When it says yield curve, it represent the > YTMS (or IRRs) of available T. securities of differing maturities. So, say today the YTM of a > 3 year 10% coupon bond is 10%, then you should compare this 10% to the YTM of 2 > year 10% coupon bond of next year, which will be lower in case of an upward sloped > Yield Curve today (assuming pure expectations theory holds) Thank you for your correction. Spot Rates Curve (Term Structure of Interest Rates) shall be used to calculate the forward rates. However, Yield Curve and Term Structure are used interchangebly as in 4.1.1.3 on P29.
Schweser has this answer in qBank related to immunization rate of return: Contingent immunization is only possible if the prevailing available immunized rate of return is greater than the required rate to ensure the funding. It works best if rates stay the same or decrease because the need to actually fully immunize never occurs. So CFAI and Schweser are both saying the same thing when ther say that immunization rate of return is LESS when the yield curve is RISING and is MORE when yield curve is FALLING
janakisri Wrote: ------------------------------------------------------- > Schweser has this answer in qBank related to > immunization rate of return: > > Contingent immunization is only possible if the > prevailing available immunized rate of return is > greater than the required rate to ensure the > funding. It works best if rates stay the same or > decrease because the need to actually fully > immunize never occurs. > > > So CFAI and Schweser are both saying the same > thing when ther say that immunization rate of > return is LESS when the yield curve is RISING and > is MORE when yield curve is FALLING IMO, contingent immunization shall be another story. I think the fundamental issue is : what is the definition of ITRR ?
AMA you are beating this horse like a red headed step child but i agree this is a fundamental issue that the book does not explain clearly