Can any one explain this Q bank Q&A on Contingent immunization Initially, each coupon bond had a market value of $1,080. INPUTS: N= 20, I/Y = 3.25, PMT = 38, FV = 1,000, CPT PV ¨ PV = -1,080 This means the original position is worth 2,800*$1,080 = $3.024 million. Under the current projections of a constant yield and a four percent reinvestment rate, the value of the coupon-bond position will be: Value per bond = value of reinvested coupons + market value of the bond Value of reinvested coupons: N= 8, I/Y = 2, PMT = 38, PV = 0 CPT FV ¨ FV = $326.15 Market value of bond in 4 years: N = 12, I/Y = 3.25, PMT = 38, FV = 1000, CPT PV ¨ PV = -1053.94 Value per bond = $326.15 + $1053.94 = $1380.09 The horizon return is 2*[(1380.09/1080)1/8 - 1] = 0.06225 or 6.225 percent Based upon the required terminal coupon-bond position value of $3.6 million the required return is 2*($3.6/$3.024)1/8 - 1)= 0.0441 or 4.41 percent. Thus the cushion spread is 6.225 percent minus 4.41 percent equals 1.815 percent. (Study Session 9, LOS 28.i)
Afraid not. I got the same answer they did with their figures but when I used the total amounts of the bond I came out with a different answer I always use totals and came up with a different horizon return. It may be rounding. I’m not going to worry too much though. It’s a simple enough concept.