LOS k: Compare and contrast immunization strategies for a single liability, multiple liabilties, and general cash flows.

Q1. Which of the following CORRECTLY describes cash flow matching for a single liability? Cash flow matching involves:

A)   selecting a bond whose cash flows coincide exactly with the payments of the liability.

B)   selecting a bond with a present value equal to the present value of the liability and with the same maturity.

C)   selecting a bond with the same duration as the liability.

Q2. Which strategy for funding multiple liabilities uses a process for selecting bonds that have cash flows that correspond to those of the liability stream?

A)   Multiple liability immunization.

B)   Cash flow matching.

C)   Combination matching.

LOS k: Compare and contrast immunization strategies for a single liability, multiple liabilties, and general cash flows. fficeffice" />

Q1. Which of the following CORRECTLY describes cash flow matching for a single liability? Cash flow matching involves:

A)   selecting a bond whose cash flows coincide exactly with the payments of the liability.

B)   selecting a bond with a present value equal to the present value of the liability and with the same maturity.

C)   selecting a bond with the same duration as the liability.

Correct answer is A)

Cash flow matching is matching up the cash flows from a bond to fund a liability stream so that the asset value of the bond is zero after the last liability is paid.

Q2. Which strategy for funding multiple liabilities uses a process for selecting bonds that have cash flows that correspond to those of the liability stream?

A)   Multiple liability immunization.

B)   Cash flow matching.

C)   Combination matching.

Correct answer is B)

The cash flow matching strategy for funding multiple liabilities uses a process for selecting bonds that have cash flows that correspond to those of the liability stream.