Immunization: target return

CFA Level III Fixed Income
#1

Hi Brave Ones,

Can anyone please help me on this one…I am lost in this yield to maturity/target yield under immunization:

In general, for an upward-sloping yield curve, the immunization target rate of return will be less than the yield to maturity because of the lower reinvestment return

Why do they say it will be less than the yield to maturity?

(Level III 2012 Volume 4 Fixed Income and Equity Portfolio Management, 5th Edition. Pearson Learning Solutions p. 29).

many thanks!

tigas

#2

This topic has been beaten to death multiple times over, no one has an answer. and there are at least 3 posts today talking about this same thing… Please see them, tigas.

#3

got it! thanks cp et al tigas

#4

Good explanation

#5

However check your spot calculations . Something wrong in it.

e.g. first year ytm = 1st year spot . Then how come you have a slightly different number i.e. 2.61_0_ and 2.61_1_

Also spot for second year is too low I think. should be 3.11%

#6

at initiaiton, ITRR = YTM

as curve slopes upward you are reinvesting at higher rates, so your YTM will increase while your ITRR remains the same, so YTM > ITRR

at initiation you were assuming that you’d be reinvesting at the same rate, but now they are being reinvested at higher rates, so the YTM > ITRR