What is meant by immunizing a bond portfolio?
What will be an ideal response?
Immunizing a bond portfolio means that the portfolio's value is protected against a general change in the rate of interest. More details are given below.
Investing in a coupon bond with a yield to maturity equal to the target yield and a maturity equal to the investment horizon does not assure that a portfolio's target accumulated value will be achieved. This is because an increase in the market yield causes the market value to fall and the portfolio can fail to achieve the target accumulated value. This can occur when the fall in principal is greater than any increase in reinvestment rate. In other words the interest rate (or price) risk has a greater impact that the reinvestment risk. To avoid this loss (and immunize its portfolio from interest rate changes), the portfolio manager should look for a coupon bond so that however the market yield changes, the change in the interest on interest will be offset by the change in the price.
The equality of the duration of the asset and the duration of the liability is the key to immunization. When generalizing this observation to portfolios, the key is to immunize a portfolio's target accumulated value (target yield). To do this, a portfolio manager must construct a bond portfolio such that the duration of the portfolio is equal to the duration of the liability, and the present value of the cash flow from the portfolio equals to the present value of the future liability.
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Indicate whether the statement is true or false
Pocket Corporation acquired 100 percent of the voting shares of Sleeve Inc. by issuing 10,000 new shares of $5 par value common stock with a $30 market value.Required:1. Which company is the parent and which is the subsidiary?2. Define a subsidiary corporation.3. Define a parent corporation.4. Which entity prepares the consolidated worksheet?5. Why are consolidation entries used?
What will be an ideal response?
The Internal Revenue Service allows a company to use LIFO for income tax purposes only if it also uses LIFO for financial reporting.
Answer the following statement true (T) or false (F)
The relationship between X and Y is spurious if ________
A) Y increases exponentially with increases in X B) the correlation between X and Y disappears when the effect of Z is controlled C) Y decreases exponentially with decreases in X D) both A and C are correct