A major requirement in managing a fixed income portfolio using a contingent immunization policy is monitoring the relationship between the current market value of the portfolio and the required value of the floor portfolio.<\/p>
Assume a $400 million portfolio with a time horizon of 6 years (so payment is due at the end of year 6).<\/p>
The available market rate at the initiation of the portfolio is 9%, but the client is willing to accept 8% as a floor rate to allow use of active management strategies.<\/p>
The current values and current market rates at the end of year 1, 2, and 3 are as follow:<\/p>
<\/p>
End of year Market Value ($mil) Market yield <\/p>
1 $390.8 11%<\/p>
2 $497.2 7%<\/p>
3 $518.1 6%<\/p>
<\/p>
Assuming semiannual compounding<\/p>
<\/p>
a\/ Calculate the required ending-wealth value for this portfolio?<\/p>
b\/ Calculate the value of the required floor portfolios at the end of year 1, 2, and 3.<\/p>
c\/ Compute the margin of error at the end of years 1, 2, and 3.<\/p>
d\/ Indicate the action that a portfolio manager utilizing a contingent immunization policy would take if the margin of error at the end of any year had been zero or negative.<\/p>
e\/ Assume that at the fourth year the manager decides to immunize. What should be the duration of the portfolio?<\/p>
f\/ If the manager chooses the duration calculated in e\/, what will be the value of the portfolio at year 6 if there is an increase of interest rate at year 5?<\/p>
Show a graph.<\/p>
g\/ If the manager chooses instead a portfolio with a higher duration and if there is an increase of interest rate in year 5 then will the fund have the correct amount, less money or more money than they should have?<\/p>
Show a graph.<\/p>
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