Reading 30 - 3 questions

1)Why is the durations of a leveraged portfolio always larger? I know the formula and everything, but what is the logic behind this? IF DURATION of the debt is larger, the duration of the portfolio actually becomes smaller, right? 2) EOC 24 contigent immuniuation uitilzes the entire portfolio? I thought if the portfolio value drops below the safety net level than NO MORE active mgmt. her it says safety net level or the terminal rate. why? 3) Choo is responsible for managing the funding liablities for a new wing at the hospital…which is currently fully funded with non-callable bonds. he is concerned with various risk associated witthe liablities including interest risk (OK), cap risk (OK), contigent claims risk (WHY?= thanks?

Q 3 has been discussed multiple times … and seems to be an old question. In the CFAI Mock of 2011 - I believe they have said no Contingent Claims risk for the non-callables.

  1. EOC 24 contigent immuniuation uitilzes the entire portfolio? I thought if the portfolio value drops below the safety net level than NO MORE active mgmt. her it says safety net level or the terminal rate. why? My understanding here is that contingent immunization uses active mgmt for the entire portfolio so long as you have a safety net. If your strategy goes wrong and the portfolio value falls to a point that you eat up all the safety net, you have to switch over to full immunization…no more active mgmt. I previously thought you fully immunized the liability and used the remainder (safety net) in an active strategy, but that is the wrong thinking as i understand it now.

please, why is this sentence correct: one can use the entire fixed-income portfolio for active mgmt until the portfolio drops bewlo the safety net leve or the terminal value…

i mean if portfolio drops below terminal, this doesnt make sence to me . i thought we have to discount this?

If portfolio drops below discounted terminal value you must immunize. Until then you can seek active management on the portfolio.