Can you help me please with something I just don't understand (or forgot perhaps) on page 37 of Volume 4 of the CFAI textbooks (Reading 20). There is a bit about contingent immunisation on page 36 and they discuss it with the example of a $500 million portfolio (at the beginning). On page 37: 'If the manager invests the entire $500 million in a 4.75%, 10 year notes at par and the YTM immediately changes, what will happen to the dollar safety margin? If the YTM suddenly drops to 3.75%, the value of the portfolio will be $541.36…' Can you guide me how to get this calculation? I don't remember all the stuff about the bond yields and YTM etc, so I'm puzzled about how they got this value from a YTM of 3.75%.

"...he manager invests the entire $500 million in a 4.75%, 10 year notes at par." PV=-500 N=20 I/Y=4.75 / 2 PMT= 500 * 0.0475 / 2 (since it's par) FV = 500 or leave PV off and so CPT -> PV, you'll get -500 anyway. now key in I/Y = 3.75 / 2 then CPT -> PV You should get 541.37

Got it, thanks @vincentt! I was entering the data wrong in my calculator, so got quite puzzled!

A CFA Level 3 Discussion About Contingent Immunization -- Change In YTM

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This topic has 2 replies, 2 voices, and was last updated Oct-174:04 am by MockTurtle.

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- MockTurtle
  Participant
  25 Oct 2017 at 11:01 pm
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  Can you help me please with something I just don’t understand (or forgot perhaps) on page 37 of Volume 4 of the CFAI textbooks (Reading 20). There is a bit about contingent immunisation on page 36 and they discuss it with the example of a $500 million portfolio (at the beginning).
  On page 37:
  ‘If the manager invests the entire $500 million in a 4.75%, 10 year notes at par and the YTM immediately changes, what will happen to the dollar safety margin?
  If the YTM suddenly drops to 3.75%, the value of the portfolio will be $541.36…’
  
  Can you guide me how to get this calculation? I don’t remember all the stuff about the bond yields and YTM etc, so I’m puzzled about how they got this value from a YTM of 3.75%.
- vincentt
  Participant
  - CFA Level 3
  25 Oct 2017 at 11:25 pm
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  3
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  “…he manager invests the entire $500 million in a 4.75%, 10 year notes at par.”
  
  PV=-500
  N=20
  I/Y=4.75 / 2
  PMT= 500 * 0.0475 / 2 (since it’s par)
  FV = 500
  
  or leave PV off and so CPT -> PV, you’ll get -500 anyway.
  
  now key in I/Y = 3.75 / 2
  then CPT -> PV
  
  You should get 541.37
- MockTurtle
  Participant
  26 Oct 2017 at 4:04 am
  Up
  3
  ::
  Got it, thanks @vincentt! I was entering the data wrong in my calculator, so got quite puzzled!
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