KIC000056 - Interest Rate Swaps Contingent Immunization...

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r Contingent Immunization Example: Suppose you are managing a $100 million bond portfolio. Your investment horizon is 3 years, interest rates are currently 10%, and the terminal value of the portfolio in 3 years must not drop below $112 million. If you start by following an active management strategy but experience losses, what is the trigger point at which you must switch to a passive strategy and immunize your portfolio? Trigger Point = $1l2M/(1.l0)3 =~ 24. \$ 1"\ Interest Rate Swaps: Example A bank holds several 30-year fixed-rate mortgages that it receives 7% on annually. The bank has to pay current market rates (4%) to its depositors, and these rates constantly fluctuate. It's been increasing the rate that it pays on short-term deposits and is worried this trend will continue. An insurance company is managing the risk of its investment portfolio and would like to lock in fixed payments in exchange for a floating rate payment. Interest Rate Swaps
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.

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