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Schweser Vol 1 Exam 3 PM - 13.4 Contingent Immunization
In this question, you are immunizing a 100MM portfolio. The acceptable return is 6% over 5 years. Current immunization rates are 8.0% using 10 year semiannual pay bonds.
The question asks you: If immunization rates jump to 11%, what rate will be the most likely to make the manager switch to immunization?
The answers are:
A) 11.0%
B) 11.7%
C) 12.5%
Answer and my question below:
The answer is B. The answer states that after you calculate the PV of the liability using the 11% rate as follows (100,000,000x1.03^10)/(1.055^(5x2))=78,676,000, you have to find the rate of return that would push that value to the required value. However, the calculator inputs shown use N = 10x2 = 20 periods, which is the life of the bonds, not the liability.
The answer shows:
FV=100,000,000
PV= -78,676,000
PMT = 4,000,000
N = 10 x 2 = 20
CPT - I/Y then double
First of all, why do you use FV=100,000,000 in this last part? Why do you want to get to the current portfolio value? Also, why do you not use N = 5x2 = 10 periods, which is the life of the liability?
I think my brain is just taking a day off here…but I can’t get it to click. Any help is appreciated. |
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发表于 2013-4-12 21:42
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