Q9. Why such description of multiple liability immunization is correct “Multiple liabilities immunization approach overcomes the limitation of fixed horizon immunization by ensuring that a specific schedule of future liabilities is met ?” What’s the limitation of fixed horizon immunization that MLI overcomes ??? Q12 The question was “Which is the least likely to be advantage of MLI ?”. The right answer is “Ease of understanding is not an advantage of multiple liability immunization” But other options were 1) Required less money (I think is advantage of MLI) 2) uses available bonds to justify liabilities schedule ( ???) 3) assumes constant rate of return for cash balances (which is I supposed disadvantage of CF matching) So among 4 answers options there is only one real advantage of MLI ( less money), but why did they choose ease of understanding among 3 remaing answers ? constant return is not an advantage either ???
Ease of understanding is not an advantage of MLI, that’s why it’s the “least likely advantage” and is the correct answer. On the other hand, cash flow matching is easier to understand than MLI. Does this answer your question? Were you confused by the wording of the question?
ok agreed, but at the same time constant rate of return for cash balances is not an advantage either ???
I’m not totally sure on this one - I don’t believe CFAI makes this explicit anywhere in their curriculum (about constant rate of return on cash), but it seems that “constant rate of return on cash balances” is an advantage (because we don’t need a varied return, we want a guaranteed return - makes sense?) I can hopefully deduce that “immunization” implies an “assured rate of return” over investment horizon and thus a “constant rate of return” is implied for cash, that’s what we strive for in immunization. On the other hand, cash flow matching reinvestment rates must differ over the planning horizon and thus would not have “constant rate of return” on coupons. If someone has it straight, please correct me.
I’m sorry. It’s my mistake. Its’ not about constant rate of return but about conservative rate of return (that’s the reason why CF matching requires more money so it’s the disadvantage of CF matching)