fm3_chapter26 - THE IMMUNIZATION PROBLEM Illustrated for...

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Unformatted text preview: THE IMMUNIZATION PROBLEM Illustrated for the 30-year bond. When the interest rate increases: When the interest rate decreases: Year 10: Future obligation of $1,790.85 due. 30 Buy $1,014 face value of 30-year bond. Reinvest coupons from bond during years 1-10. Sell bond for PV of remaining coupons and redemption in year 30. Value of reinvested coupons increases . Value of bond in year 10 decreases . Value of reinvested coupons decreases . Value of bond in year 10 increases . UN-16C Page 2 BASIC IMMUNIZATION EXAMPLE W Yield to maturity 6% Bond 1 Bond 2 Bond 3 Coupon rate 6.70% 6.988% 5.90% Maturity 10 15 30 Face value 1,000 1,000 1,000 Bond price $1,051.52 $1,095.96 $986.24 Face value equal to $1,000 of market value $951.00 $912.44 $1,013.96 Duration #MACRO? #MACRO? #MACRO? New yield to maturity 6% Bond 1 Bond 2 Bond 3 Bond price $1,000.00 $1,041.62 $988.53 Reinvested coupons $883.11 $921.07 $777.67 Total $1,883.11 $1,962.69 $1,766.20 Multiply by percent of face value bought 95.10% 91.24% 101.40% Product $1,790.85 $1,790.85 $1,790.85 Bond 1 Bond 2 0% $1,588.18 $1,868.87 1% $1,617.63 $1,844.71 2% $1,648.69 $1,825.14 3% $1,681.45 $1,810.05 4% $1,716.00 $1,799.35 5% $1,752.43 $1,792.97 6% $1,790.85 $1,790.85 7% $1,831.35 $1,792.95 8% $1,874.05 $1,799.26 9% $1,919.06 $1,809.76 Data table: Bond value sensitivity to interest rate A B C D 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 UN-16C Page 3 10% $1,966.49 $1,824.46 11% $2,016.48 $1,843.37 12% $2,069.16 $1,866.53 13% $2,124.66 $1,893.98 14% $2,183.12 $1,925.77 15% $2,244.70 $1,961.98 A B C D 37 38 39 40 41 42 UN-16C Page 4 ITH 3 BONDS #MACRO? #MACRO? #MACRO? #MACRO? #MACRO? #MACRO? #MACRO? #MACRO? Bond 3 #MACRO? $2,808.66 $2,536.42 $2,315.61 $2,137.23 $1,994.02 $1,880.14 $1,790.85 $1,722.34 $1,671.53 $1,635.92 E F 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 UN-16C Page 5 $1,613.46 $1,602.53 $1,601.79 $1,610.17 $1,626.82 $1,651.05 E F 37 38 39 40 41 42 UN-16C...
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This note was uploaded on 01/23/2011 for the course FGB 780 taught by Professor Edwardchang during the Spring '09 term at Missouri State University-Springfield.

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fm3_chapter26 - THE IMMUNIZATION PROBLEM Illustrated for...

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