Immunization (Cushion spreads and such)

number, returns, manager, problems, couple

I know there has been a lot of talk on this on the boards, but just wanted a quick answer here:

For each problem when they talk about "the manager has an acceptable return of 5%". Where does this number play in any of the calculations at all? I have done a couple of problems and never once had to use there acceptable returns.....

Lemme know and thx in advance!

mp3bu

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发表于 2011-7-13 13:32 | 只看该作者

That would be the value that is used to find the terminal value of the liability of the portfolio.

i.e. 100MM to invest now for 3 years. 100(1.025)^6 would give the terminal value. Then obviously that value discounted by the current immunization rate.

Edited 1 time(s). Last edit at Tuesday, May 31, 2011 at 12:02PM by Paraguay.

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cityboy

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发表于 2011-7-13 13:32 | 只看该作者

Oh ok.

So hypothetically:

100M for 5 years at a acceptable rate of 5% (semiannual) = 128M terminal value

Immunization rate = 6% (semiannual) = 128 / (1.03)^10 = 95.24M

Currently own a bond at 100M, 10 year semi annual, with 6% coupon. = 100M (since immunization rate = coupon it is trading at par)

If rates increased by 2% to 8% immediately

Current PV Bond:

n = 20
IR = 4%
PMT = 3M
FV = 100M
PV = calculated = -86409673.66

Revised Immunization trigger point (whats the name of this number again?)

128M / (1.04)^10 = 86.47M

Since 86.40 < 86.47 , immunization is triggered

Anything wrong here?

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ohai