Three portfolio managers are discussing a strategy for immunizing a portfolio so as to achieve a target yield. Manager A, whose portfolio consists of Treasury secu- rities and option-free corporates, stated that the duration of the portfolio should be constructed so that the Macaulay duration of the portfolio is equal to the num- ber of years until the liability must be paid. Manager B, with the same types of se- curities in his portfolio as Manager A, feels that Manager A is wrong because the portfolio should be constructed so that the modified duration of the portfolio is equal to the modified duration of the liabilities. Manager C believes Manager B is correct. However, unlike the portfolios of Managers A and B, Manager C invests in mortgage-backed securities and callable corporate bonds. Discuss the position taken by each manager and explain why they are correct.

AppendixLO1