The Following Information Relates to Questions
Chaopraya Av Is an Investment

question 11

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.
-Discuss the effectiveness of av's immunization strategy in terms of duration gaps.

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