SECTION 1 GRANITE IS NOT ONLY TILTING THE PORTFOLIOS WITH REGARD TO...

3.) Which of the following statements regarding Whitney's recommendations for Norris's

three clients is most likely correct?

A. Client 2 will meet the necessary conditions for a multiple-liability immunization in

the case of a non-parallel rate shift.

B. Client 3 will require less money to fund liabilities with the proposed strategy relative

to cash flow matching.

C. Client 1 will only achieve the guaranteed value if the term structure of interest rates

is downward sloping.

Answer = B

"Fixed-Income Portfolio Management – Part I," H. Gifford Fong and Larry D. Guin

Sections 4.2, 4.2.1

Perfect matching of assets and liabilities is unlikely given the difficulty in finding all the

bonds in the market that exactly match the liabilities. As a result, cash flow matching

requires a relatively conservative rate of return assumption for short-term cash, and

cash balances may occasionally be substantial.