) IS MARKOV CORRECT REGARDING THE NECESSARY CONDITIONS TO IMMUNIZE THE GIC PORTFOLIO FOR HIS CLIENT
3.) Is Markov correct regarding the necessary conditions to immunize the GIC portfolio for
his client?
A.
No, he is incorrect regarding duration
B.
Yes
C.
No, he is incorrect regarding the bond portfolio characteristics
Answer = C
To immunize a portfolio's target value or target yield against a change in the market
yield, a manager must invest in a bond or a bond portfolio whose (1) duration is equal to
the investment horizon and (2) initial present value of all cash flows equals the present
value of the future liability. Thus, investing in a bond portfolio with a yield to maturity
equal to the target yield and a maturity equal to the investment horizon does not assure
that the target value will be achieved because of reinvestment risk.
“Fixed-Income Portfolio Management - Part I,” by H. Gifford Fong and Larry D. Guin