“He can use the entire fixed-income portfolio for active management until the portfolio drops below the safety net level or terminal value.”
I thought we are comparing the PVA (portfolio value) with the PVL(discounted terminal value) to get the surplus amount
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Here why are we using te PVA to compare with the terminal value and safety net level directly?
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If we use the undiscounted value for liability, shouldn’t we use the undiscounted value for the asset as well?
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Is the safety net level the same as the initial surplu amount?
Thank you!
In this case, I believe they are using “safety net level” and “terminal value” interchangeably, thus safety net level is not the same as “safety net margin” or the “surplus” you’re referring to. The statement probably could have been worded better to say something like “present value of the required terminal value”, as indeed you are comparing of the PV of the bond portfolio to the PV of the future liability discounted to the present based on the “immunization rate” or expected rate of return.
In the end, the question is pretty much a softball anyways as the other two choices are clearly wrong.
Good to know! Thanks for clarifying, JayWill! Just wanted to make sue I understand this.