Re-test contingent immunization Q interest, decided, manager, willing

Nishant1

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, what is the dollar safety margin ?

Roflnadal

Around 303066?

cv4cfa

not only does n change, you also have to add to your calculated PV with 1 year worth of reinvestment return.
it is semi annual payment, so coupon+couponx(1+I/Y)^0.5 is added to arrive at total bond value.
I think the reinvestment I/Y to use is 10%.
Schweser had this in one of its practice exams.

Windjammer

mcap11 wrote:
^ i also get $303,066 safety margin
PV assets = 86,884,460
Reequired assets = 86,581,393




^this

canadiananalyst

remember this.(one year later q)
I often got wrong answer on contingent immuz question…Do you write down the formula or inputs for TVM first? Thanks.

AnalystForum

Why not show yours first?

strikethree

page page 35 says there is a “lack of assurance that the immunization rate (9%) will be achieved.”
Now I notice it’s different from point 1. It may mean that: when the rate rises, the dollar safety margin is 0 and it switches to immunization mode. We have to consider the re-investment in this case, since the immunization rate is a total rate of return… Especially when the yield curve is upward sloping.