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.
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