Chapter12 - Chapter Twelve Futures Contracts and Portfolio...

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Chapter Twelve Futures Contracts and Portfolio Management Answers to Problems and Questions 1. Immunization refers to the situation in which the effects of interest rate risk and reinvestment rate risk largely cancel. 2. Bullet immunization seeks to ensure that a predetermined sum of money is available at a specific time in the future. Bank immunization seeks to ensure that net worth does not decline due to changing interest rates. This latter type requires consideration of both the interest sensitive assets and the interest sensitive liabilities on the balance sheet. 3. If interest rates rise, bond prices will fall, but coupons received can be reinvested at a higher rate than before the interest rate change. The converse is true if rates fall. Interest rate risk and reinvestment rate risk generally affect a portfolio in opposite directions. Under bullet immunization, the effects of the two types of risk cancel. 4. The funds gap is the difference between a firm’s rate sensitive
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This note was uploaded on 01/31/2011 for the course ACCT 331 taught by Professor N/a during the Spring '10 term at Mountain State.

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Chapter12 - Chapter Twelve Futures Contracts and Portfolio...

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