33. Which of the following statements regarding Whitney’s recommendations for Norris’ three
clients is most likely correct?
A. Client 1 will achieve the guaranteed value only if the term structure of interest rates is
downward sloping.
B. Client 2 will meet the necessary conditions for a multiple-liability immunization in the case
of a non-parallel rate shift.
C. Client 3 will require less money to fund liabilities because a less conservative rate of return
can be assumed for short-term balances.
Answer = C
“Fixed-Income Portfolio Management – Part I,” H. Gifford Fong and Larry D. Guin
2013 Modular Level III, Vol. 4, Reading 23, Section 4.1
Study Session 9–23–f; k
Formulate a bond immunization strategy to ensure funding of a predetermined liability and
evaluate the strategy under various interest rate scenarios.
Compare immunization strategies for a single liability, multiple liabilities, and general cash flows.
C is correct because 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 be occasionally substantial.
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