Reading 29: Fixed-Income Portfolio Management—Part I- LOS

statements, following, including, interest, manager

LOS i: Discuss the extensions that have been made to classical immunization theory, including the introduction of contingent immunization.

Q1. If interest rates rise sufficiently such that the dollar safety margin is negative in a contingent immunization strategy, which of the following statements is FALSE?

A) The portfolio manager can no longer use contingent immunization.

B) A switch to immunization is necessary.

C) Contingent immunization is still a viable alternative.

Q2. A portfolio manager has decided to pursue a contingent immunization strategy over a four-year time horizon. He just purchased at par $26 million worth of 6% semiannual coupon, 8-year bonds. Current rates of return for immunized strategies are 6% and the portfolio manager is willing to accept a return of 5%. Given that the required terminal value is $31,678,475, and if the immunized rates rise to 7% immediately, which of the following is most accurate? The dollar safety margin is:

A) negative (-$1,423,980) and the portfolio manager must switch to immunization.

B) positive ($370,765) and the portfolio manager can continue with contingent immunization.

C) positive ($6,158,602) and the portfolio manager can continue with contingent immunization.

Q3. A portfolio manager has decided to pursue a contingent immunization strategy over a three-year time horizon. He just purchased at par $93 million worth of 10.0% semiannual coupon, 12-year bonds. Current rates of return for immunized strategies are 10.0% and the portfolio manager is willing to accept a return of 8.5%. If interest rates rise to 11% immediately, which of the following statements is most accurate? The dollar safety margin is:

A) positive ($303,066) and the portfolio manager can continue with contingent immunization.

B) negative (-$2,489,748) and the portfolio manager must switch to immunization.

C) positive ($303,066) and the portfolio manager must switch to immunization.

Q4. Which of the following is NOT a key consideration in implementing a contingent immunization strategy?

A) Decide in advance about the frequency the portfolio will be rebalanced.

B) Identifying a suitable and immunizable safety net.

C) Establishing well defined immunized initial and ongoing available target returns.

Q5. In a contingent immunization strategy, which of the following is a reason why the minimum target return might NOT be realized? The minimum target return might not be realized because:

A) interest rates move in a nonparallel manner.

B) the yield volatility changes.

C) there is a rapid market yield movement.

Q6. A portfolio manager has decided to pursue a contingent immunization strategy over a three-year time horizon. She just purchased at par $84 million worth of 9.2% semi-annual coupon, 10-year bonds. Current rates of return for immunized strategies are 9.2% and the portfolio manager is willing to accept a return of 8.5%. Given that the required terminal value is $107,829,022, and if interest rates rise to 11% immediately, which of the following is most accurate? The dollar safety margin is:

A) negative (-$3,237,038) and the manager can continue with contingent immunization.

B) positive ($1,486,948) and the manager can continue with contingent immunization.

C) negative (-$3,237,038) and the manager must switch to immunization.