Re-test contingent immunization Q

CFA Level III
#21

The safety net return(8%) is a required return, while the immunization rate is a target rate of return – a kind of total rate of return.

At the end, the liability in the future time should be met, and that’s the objective. So the reinvestment rate, which could fall after you switch to passive mode, should factor in. A lower reinvestment rate could make the portfolio value lower than the liability at horizon date.

I think that is not a problem if it’s immunized with zero-coupon bonds only.

#22

Good point. A posible way of complicating. That is giving spot rates and forward rates.

#23

can someone please post the PV of the bond calculations. thnks

edit: both calculations please

#24

FV=93, PMT=93*.05=4.65, N=24, I/Y=24

CPT PV=-86.8846

#25

I/Y=5.5?

#26

i keep getting this:

liability = 93mil(1+.085/2)^6 = 119,382,132

pv = 119,382,132/(1+.11/2)^6 = 86,584,081

pv bond

fv =93 mil

pmt 4.65 mil

n =24

i = 5.5

PV = 86,884,459

cushion = 86,884,459 - 86,584,081 = 300,378

am i off due to rounding?

edit: figured the issue i was using discount rate as 1.3788 should of used 1.37884281

would this get full credit, i used 4 decimal places instead of 8?

#27

termial value = 93M(1.0425)^6 = 119,382,132

PV assets = 86.884M, calculated as:

FV = 93m, n = 24, i/y = 5.5%, PMT = 4.625M

Required Assets = 86.581M calculated as:

FV=19.382M, N = 6, I/Y = 5.5%

CUSHON = 86.884 - 86.581 = 303k

#28

now what if the question asks If interest rates rise to 11% ONE YEAR FROM NOW, what is the dollar safety margin…