In reading 23, page 35 of CFA book volume 4 - There is a calculation of COntingent immunization. I understood the initial calculation of 25$ which can be put under active management.
What I didnt understand is that they make this statement? If the YTM, suddenly drops to 3.75%, the value of portfolio will be 541.36$.
Could someone please tell me how did they reach this figure 541.36$ please?
this is just using the PV and FV functions on your calculator…
So for the original bond purchase (assuming semi annual coupons, which is standard): FV = $500,000,000, I/Y = 2.375, N = 20, PMT = 11,875,000. Obviously the PV will be $500m because the bonds are priced at par.
Now change the I/Y to (3.75/2) = 1.875 and compute the PV again. You should get the number in the textbook.