› CFA › CFA Level 3 › Contingent Immunization — change in YTM

Contingent Immunization — change in YTM

Reply
Login
  • Author
    Posts
  • MockTurtle
    Participant
    Forum Level 1 Summer Associate
    25 Oct 2017 at 11:01 pm
    Up
    0
    Down

    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
    Forum Level 1 Summer Associate
    25 Oct 2017 at 11:25 pm
    Up
    3
    Down

    “…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
    Forum Level 1 Summer Associate
    26 Oct 2017 at 4:04 am
    Up
    3
    Down

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

  • Author
    Posts
Viewing 3 posts - 1 through 3 (of 3 total)
  • You must be logged in to reply to this topic.