Hello,
please help me to understand the calculation for 541.36 and 460.52.
If the YTM suddenly drops to 3.75 percent, the value of the portfolio will be $541.36 million. The initial asset value required to satisfy the terminal value of $546.72 million at 3.75 percent YTM is $489.06 million so the dollar safety margin has grown to $541.36 million − $489.06 million = $52.3 million. The manager may therefore commit a larger proportion of her assets to active management.
If rates rise so that the YTM is now 5.80 percent, the portfolio value will be $460.55 million and the initial asset value required will be $460.52 million. The dollar safety margin has gone to zero, and thus the portfolio must be immunized immediately.
thanks