The Following Information Relates to Questions
Chaopraya Av Is an Investment

question 24

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.
-Recommend the portfolio in exhibit 1 that would best achieve the immunization. Justify your response. Template :
Recommend the portfolio in exhibit 1 that would best achieve the immunization. (circle one) Justify your response. Portfolio a Portfolio b Portfolio C Cy and av now discuss option 2.av estimates the present value of the four future cash flows as $230,372, with a money duration of $2,609,700 and convexity of 135.142. She considers three possible portfolios to
immunize the future payments, as presented in exhibit 2. EXHIBIT 2
Data for Bond Portfolios to Immunize Four Annual Contributions
$\begin{array}{llll} \hline & \text { Portfolio 1 } & \text { Portfolio 2 } & \text { Portfolio 3 } \\\hline \text { Market value } & \$ 245,178 & \$ 248,230 & \$ 251,337 \\\text { Cash flow yield } & 2.521 \% & 2.520 \% & 2.516 \% \\\text { Money duration } & 2,609,981 & 2,609,442 & 2,609,707 \\\text { Convexity } & 147.640 & 139.851 & 132.865\\\hline\end{array}$

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Definitions:

Inter-Entity Transactions

Transactions occurring between two parts of the same company, often requiring elimination adjustments in consolidated financial statements.

NCI

Non-controlling interest, a portion of the equity in a subsidiary not attributable directly or indirectly to the parent company.

Profit

The financial gain realized when the revenues generated from business activities exceed the expenses, taxes, and costs associated with maintaining the business.

Inter-Entity Transactions

Transactions that occur between two entities within the same parent company or corporate group, affecting the accounting practices and consolidation processes of the group.