A fixed-income portfolio manager sets a minimum acceptable rate of return on the bond portfolio at 4.0% per year over the next 3 years. The portfolio is currently worth $10 million. One year later interest rates are at 5.0%. What is the portfolio value trigger point at this time that would require the manager to immunize the portfolio

The portfolio value trigger point at this time that would require the manager to immunize the portfolio would be $12,401,625

Explanation:

In order to calculate the portfolio value trigger point we would have to calculate first the Minimum terminal value as follows:

Minimum terminal value=portfolio value*(1+rate of return)∧3

portfolio value= $10 million

rate of return=4.0%

Hence, Minimum terminal value=$10,000,000*(1.04)∧3

Minimum terminal value=$11,248,640

To calculate the portfolio value trigger point we would have to make the following calculation:

portfolio value trigger point=Minimum terminal value*(1+interest rates)∧2

portfolio value trigger point=$11,248,640*(1.05)∧2

portfolio value trigger point=$12,401,625

The portfolio value trigger point at this time that would require the manager to immunize the portfolio would be $12,401,625

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