Portfolio Management Solution
International Portfolio Management
Fall 2010
PROBLEM SET 1
Investment Policy and Bond Portfolio management
Due date: Friday, September 17, 5:00 pm. No late problem sets will be accepted.
1. Assume that at retirement you have accumulated $825,000 in a variable annuity contract. The assumed investment return is 5.5% and your life expectancy is 18 years. What is the hypothetical constant benefit payment?
PV = -825,000, i = 5.5, n = 18, PMT = 73,358.93.
2. You manage a portfolio for Ms. Greenspan, who has instructed you to be sure her portfolio has a value of at least $350,000 at the end of six years. The current value of Ms. Greenspan 's portfolio is $250,000. You can invest the money at a current interest rate of 8%. You have decided to use a contingent immunization strategy. - What amount would need to be invested today to achieve the goal, given the current interest rate? - Suppose that four years have passed and the interest rate is 9%. What is the trigger point for Angel 's portfolio at this time? (That is, how low can the value of the portfolio be before you will be forced to immunize to be assured of achieving the minimum acceptable return?) - Illustrate the situation graphically. - If the portfolio 's value after 4 years is $291,437 what should you do?
Calculations are shown below. - Amount needed to reach the goal = $350,000/1.086 = $220,559.37 - The trigger point = $350,000/1.092 = $294,588.00 - The graph should look like the ones in Figure 16.11 on page 542. - You should immunize the portfolio because its value is below the trigger point. If the value is $291,437 you will need to earn a rate of 9.59% over the remaining two years to achieve the goal of $350,000: $350,000 = $291,437 * (1+r)2. Solving for r yields 9.59%
3. True or False (Please explain your answer!)
Two bonds are selling at par value and each has 17 years to maturity. The first bond
Fall 2010
PROBLEM SET 1
Investment Policy and Bond Portfolio management
Due date: Friday, September 17, 5:00 pm. No late problem sets will be accepted.
1. Assume that at retirement you have accumulated $825,000 in a variable annuity contract. The assumed investment return is 5.5% and your life expectancy is 18 years. What is the hypothetical constant benefit payment?
PV = -825,000, i = 5.5, n = 18, PMT = 73,358.93.
2. You manage a portfolio for Ms. Greenspan, who has instructed you to be sure her portfolio has a value of at least $350,000 at the end of six years. The current value of Ms. Greenspan 's portfolio is $250,000. You can invest the money at a current interest rate of 8%. You have decided to use a contingent immunization strategy. - What amount would need to be invested today to achieve the goal, given the current interest rate? - Suppose that four years have passed and the interest rate is 9%. What is the trigger point for Angel 's portfolio at this time? (That is, how low can the value of the portfolio be before you will be forced to immunize to be assured of achieving the minimum acceptable return?) - Illustrate the situation graphically. - If the portfolio 's value after 4 years is $291,437 what should you do?
Calculations are shown below. - Amount needed to reach the goal = $350,000/1.086 = $220,559.37 - The trigger point = $350,000/1.092 = $294,588.00 - The graph should look like the ones in Figure 16.11 on page 542. - You should immunize the portfolio because its value is below the trigger point. If the value is $291,437 you will need to earn a rate of 9.59% over the remaining two years to achieve the goal of $350,000: $350,000 = $291,437 * (1+r)2. Solving for r yields 9.59%
3. True or False (Please explain your answer!)
Two bonds are selling at par value and each has 17 years to maturity. The first bond