The Following Information Relates to Questions
Chaopraya Av Is an Investment

Essay

The following information relates to Questions
Chaopraya av is an investment advisor for high-net-worth individuals. one of her clients,Schuylkill Cy, plans to fund her grandson's college education and considers two options:
option 1 Contribute a lump sum of $300,000 in 10 years.
option 2 Contribute four level annual payments of $76,500 starting in 10 years.The grandson will start college in 10 years. Cy seeks to immunize the contribution today.For option 1, av calculates the present value of the $300,000 as $234,535. to immunize the future single outflow, av considers three bond portfolios given that no zero-coupon govern- ment bonds are available. The three portfolios consist of non-callable, fixed-rate, coupon-bearing government bonds considered free of default risk. av prepares a comparative analysis of the three portfolios, presented in exhibit 1.
$$\begin{array}{l}\text { EXHIBIT } 1 \text { Results of Comparative Analysis of Potential Portfolios }\\\begin{array} { l c c c } \hline & \text { Portfolio A } & \text { Portfolio B } & \text { Portfolio C } \\\hline \text { Market value } & \$ 235,727 & \$ 233,428 & \$ 235,306 \\\text { Cash flow yield } & 2.504 \% & 2.506 \% & 2.502 \% \\\text { Macaulay duration } & 9.998 & 10.002 & 9.503 \\\text { Convexity } & 119.055 & 121.498 & 108.091 \\\hline\end{array}\end{array}$$
av evaluates the three bond portfolios and selects one to recommend to Cy.
-Determine the most appropriate immunization portfolio in exhibit 2. Justify your decision. $\text {Template for Question 25}$
$\text {Determine the most appropriate}$
$\text { immunization portfolio in Exhibit 2.}$

$\begin{array}{llcc}\text {(circle one)} & \text { Justify your decision. } \\ \hline \text {Portfolio 1 } &\\ \text {Portfolio 2 } &\\ \text { Portfolio 3 } &\\ \hline\end{array}$




after selecting a portfolio to immunize Cy's multiple future outflows, av prepares a report on how this immunization strategy would respond to various interest rate scenarios. The sce-nario analysis is presented in exhibit 3. $$\begin{array}{l}\text { EXHIBIT } 3 \text { Projected Portfolio Response to Interest Rate Scenarios }\\\begin{array} { l c c c } \hline & \text { Immunizing Portfolio } & \text { Outflow Portfolio } & \text { Difference } \\\hline \text { Upward parallel shift } & & &\\\Delta \text { Market value } & - 6,410 & - 6,427 &18 \\\Delta \text { Cash flow yield } & 0.250 \% & 0.250 \% & 0.000\% \\\Delta \text { Portfolio BPV } & - 9 & - 8 & -1 \\\text { Downwardparallel shift } & & & \\\Delta \text { Market value } & 6,626 & 6,622 &4\end{array}\end{array}$$ $$\begin{array} { l c c c } \hline & \text { Immunizing Portfolio } & \text { Outflow Portfolio } & \text { Difference } \\\hline \Delta \text { Cash flow yield } & - 0.250 \% & - 0.250 \% & 0.000 \% \\\Delta \text { Portfolio BPV } & 9 & 8 & 1 \\\text { Steepening twist } & & & \\\Delta \text { Market value } & - 1,912 & 347 & - 2,259 \\\Delta \text { Cash flow yield } & 0.074 \% & - 0.013 \% & 0.087 \% \\\Delta \text { Portfolio BPV } & - 3 & 0 & - 3 \\\text { Flattening twist } & & & \\\Delta \text { Market value } & 1,966 & - 343 & 2,309 \\\Delta \text { Cash flow yield } & - 0.075 \% & 0.013 \% & - 0.088 \% \\\Delta \text { Portfolio BPV } & 3 & 0 & 3 \\\hline\end{array}$$