G.3.1 Redington Immunization

Question 1

what is the eqn for Surplus?

Answer 1

S = P_A - P_L

Question 2

what are liability cash flows and assets cash flows?

Answer 2

liability cash flows – payments that a company is required to
make

asset cash flows – payments that a company will receive from
its investments

Question 3

what do you know abt S, P_A, P_L as interest rate change?

Answer 3

If interest rates fall, PA may increase by less than PL.

If interest rates rise, PA may fall by more than PL.

In both of these cases S declines

Question 4

what is immunization?

Answer 4

the act of protecting a surplus position from changes in the rate of interest

Question 5

what is redington immunization?

Answer 5

Redington Immunization will protect the surplus from small changes in the interest rate.

Question 6

what are the assumptions and conditions abt Redington immunization?

Answer 6

Assumptions:
- flat yield curve, i.e. all spot rates the same
- only parallel shifts in the yield curve

Conditions for Redington Immunization
1. PA = PL
2. ModD_A = ModD_L or equivalently MacD_A = MacD_L
3. Conv_A > Conv_L or equivalently MacC_A > MacC_L

Alternate Conditions:
1. S(i) = 0
2. S’(i) = 0
3. S”(i) > 0

Question 7

what exactly does a flat yield curve mean for the problem your working on?

Answer 7

length of time = yield rate.

Ex. 5 year bond yields 5%