You manage a portfolio for Ms. B, who has instructed you to be sure her portfoli

Question

You manage a portfolio for Ms. B, 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.

i. What amount would need to be invested today to achieve the goal, given the current interest rate?                                                                           (6 marks)

ii). 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?                                    (6 marks)

iii)If the portfolio's value after 4 years is $291,437 what should you do?

Explanation / Answer

1) Amount needed to reach the goal = $350,000/1.086 = $220,559.37

2) The trigger point = $350,000/1.092 = $294,588.00

You should immunize the portfolio because its value is below the trigger point.

3) 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%.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.