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Problem 13-11

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. This difference is defined as the margin of error. In this regard, assume a $200 million portfolio with a time horizon of five years. The available market rate at the initiation of the portfolio is 12%, but the client is willing to accept 10% as a floor rate to allow use of active management strategies. The current market values and current market rates at the end of Years 1, 2, and 3 are as follows:

End of Year	Market Value ($ Mil)		Market Yield
1	$231.3		11	%
2	266.3		9
3	267.5		11

Assume that semiannual compounding is used. Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $1.20 million should be entered as 1.20, not 1,200,000. Round your answers to two decimal places.

Calculate the required ending-wealth value for this portfolio.

$ million

Calculate the required ending-wealth value for this portfolio at the end of Years 1, 2, and 3.

End of Year 1: $ million

End of Year 2: $ million

End of Year 3: $ million

Compute the margin of error at the end of Years 1, 2, and 3.

End of Year 1: $ million

End of Year 2: $ million

End of Year 3: $ million

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.

If the margin of error at the end of any year had been zero or negative, the portfolio manager would -Select-discontinuecontinueItem 8 active management of the portfolio and immunize it.