CFA CFA Level 3 Immunisation and YTM

Immunisation and YTM

  • This topic has 6 replies, 3 voices, and was last updated Oct-17 by RaviVooda.
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    • Alta12
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      @vincentt @RaviVooda

      I don’t understand the following in relation to immunisation. Please help…

      – For an upward sloping yield curve, immunisation target rate of return < YTM because of the lower reinvestment return. - For a downward sloping yield curve, the immunisation target rate of return > YTM because of the higher reinvestment return.

      Wouldn’t the coupons be reinvested at the short term rates available at the time? How to link the coupons with the slope of yield curve as the coupons are due at different times? …confused

    • RaviVooda
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      @alta12, Take the scenario of upward sloping curve,
      consider a 1 year duration and a coupon every 6 months. Now after 6 months you get a coupon. Now that there is upward sloping curve, for 6 months duration yeild will be less than what you got for a one year duration. So our target rate of return less than YTM (had the same money invested without coupon at the beginning)

    • Alta12
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      @ravivooda so you move along the x axis (time to maturity) to the left not the right hence lower yield for the coupon reinvestment?

    • RaviVooda
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      @alta12 we move towards right only say 1 yr, 2 yr,… 10 yr.. So if it is upward sloping and say now the new coupon received has to be invested for only 3 months, so the yield for that 3 months will be found in the beginning of the x-axis

    • Alta12
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      Yes, that’s what I meant! Got it! Thanks heaps. Fixed income is giving me grief especially in the Schweser mocks 🙁

    • vincentt
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      never had to compare immunization rate of return vs YTM, thanks for raising this question @Alta12‌ and thanks for explaining @RaviVooda

    • RaviVooda
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      @alta12, for me derivatives is giving nightmares 🙁

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