Contingent Immunization

CFA Level III Fixed Income
#1

Do we always use the Immunization Rate as a discount rate to calculate the PVL (present value of liability) and YTM as a discount rate to find out the Present Value of Asset?

  1. In the example provided by the Kaplan Note for “Contingent Immunization” on page 225 if you have it.

They used 4% (immunization rate) in the fist example to discount the FVL to find out PVL (present value of liability)

In the second situation they mentioned on the same page, they used 3.9% (YTM) to discount the Future value of asset to find out the “Present value of asset”.

Thank you!

#2

The immunization rate is the return that you need to fund the future liability, so we discount the FVL using immunization rate.

#3

I know which rates to use but I dont understand why we semi-annualize the immunization rates. That doesnt make sense to me if the immunization rate is based off of a zero-coupon bond.

#4

In the cfa, for bonds they usually do it with every 6 months unless stated elsewhere. (remember bond equivalent yield?)

#5

What other yield convention would make more sense?

Why?

#6

Clear now! Thank for all your help! Sometimes, I feel like I am just tired of reading the material. I guess I need to change the attitude now :slight_smile: