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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