Question

A fixed-income portfolio manager sets a minimum acceptable rate of return on the bond portfolio at 4.0% per year over the next 3 years. The portfolio is currently worth $10 million. One year later interest rates are at 5.0%. What is the portfolio value trigger point at this time that would require the manager to immunize the portfolio

Answer 1

The portfolio value trigger point at this time that would require the manager to immunize the portfolio would be $12,401,625

Step-by-step explanation:

In order to calculate the portfolio value trigger point we would have to calculate first the Minimum terminal value as follows:

Minimum terminal value=portfolio value*(1+rate of return)∧3

portfolio value= $10 million

rate of return=4.0%

Hence, Minimum terminal value=$10,000,000*(1.04)∧3

Minimum terminal value=$11,248,640

To calculate the portfolio value trigger point we would have to make the following calculation:

portfolio value trigger point=Minimum terminal value*(1+interest rates)∧2

portfolio value trigger point=$11,248,640*(1.05)∧2

portfolio value trigger point=$12,401,625

The portfolio value trigger point at this time that would require the manager to immunize the portfolio would be $12,401,625