固定收益证-券Indexing课件

Chapter24

Indexing

Chapter24

Indexing

LearningObjectivesAfterreadingthischapter,youwillunderstandtheobjectivesandmotivationforbondindexingtheadvantagesanddisadvantagesofbondindexingthethreemajorbroad-basedbondmarketindexesthesectorsofthebroad-basedindexesthethreemethodologiesusedforconstructinganindexedportfolioLearningObjectivesAfterreadiLearningObjectives

(continued)Afterreadingthischapter,youwillunderstandthedifficultiesassociatedwithimplementingabondindexingstrategytheobjectivesandmotivationforenhancedbondindexingthestrategiesusedinenhancedindexingLearningObjectives

(continuedObjectiveofandMotivationforBondIndexingBondindexingmeansdesigningaportfoliosothatitsperformancewillmatchtheperformanceofsomebondindex.Inindexing,performanceismeasuredintermsoftotalrateofreturnachieved(orsimply,totalreturn)oversomeinvestmenthorizon.Totalreturnoversomeinvestmenthorizonincorporatesallsourcesofreturnfromholdingaportfolioofbonds.ObjectiveofandMotivationfoObjectiveofandMotivationforBondIndexing(continued)Severalfactorsexplainthepopularityofbondindexing.First,theempiricalevidencesuggeststhathistoricallytheoverallperformanceofactivebondmanagershasbeenpoor.Secondisthereducedadvisorymanagementfeeschargedforanindexedportfoliocomparedtoactivemanagementadvisoryfees.Lowernonadvisoryfeesareathirdexplanationforthepopularityofindexing.ObjectiveofandMotivationfoObjectiveofandMotivationforBondIndexing(continued)Advisoryfeeschargedbyactivemanagerstypicallyrangefrom15to50basispoints.Therangeforindexedportfolios,incontrast,is1to20basispoints,withtheupperrangerepresentingthefeesforenhancedandcustomizedbenchmarkfunds,discussedlaterinthischapter.ObjectiveofandMotivationfoObjectiveofandMotivationforBondIndexing(continued)Sponsorshavegreatercontroloverexternalmanagerswhenanindexingstrategyisselected.Forexample,inanactivelymanagedportfolio,asponsorwhospecifiesarestrictionontheportfolio’sdurationstillgivesthemanagerampleleewaytopursuestrategiesthatmaysignificantlyunderperformtheindexselectedasabenchmark.Incontrast,requiringaninvestmentadvisortomatchanindexgiveslittleleewaytothemanagerand,asaresult,shouldresultinperformancethatdoesnotsignificantlydivergefromabenchmark.ObjectiveofandMotivationfoObjectiveofandMotivationforBondIndexing(continued)Criticsofindexingpointoutthatalthoughanindexingstrategymatchestheperformanceofsomeindex,theperformanceofthatindexdoesnotnecessarilyrepresentoptimalperformance.Moreover,matchinganindexdoesnotmeanthatthemanagerwillsatisfyaclient’sreturnrequirementobjective.Matchinganindexmeansthatamoneymanagerisrestrictedtothesectorsofthebondmarketthatareintheindex,eventhoughtheremaybeattractiveopportunitiesinmarketsectorsexcludedfromtheindex.ObjectiveofandMotivationfoObjectiveofandMotivationforBondIndexing(continued)Atthetheoreticallevel,therearethewell-knownbenefitsofdiversificationassetforthintheMarkowitzmean-varianceportfoliotheory.Capitalmarkettheorytellsusamarketportfoliooffersthehighestlevelofreturnperunitofriskinanefficientmarket.Themarketportfolioisacapitalization-weighted(value-weighted)portfolioofallriskyassets.Exhibit24-1(seeOverhead24-10)summarizestheadvantagesanddisadvantagesofbondindexing.ObjectiveofandMotivationfoExhibit24-1AdvantagesandDisadvantagesofBondIndexingAdvantagesDisadvantagesNodependenceonexpectationsandlittleriskofunderperformingtheindexBondindexesdonotreflectoptimalperformanceReducedadvisoryandnonadvisoryfeesBondindexmaynotmatchthesponsor’sliabilitiesGreatersponsorcontrolRestrictionsonfund;managementignoresopportunitiesExhibit24-1AdvantagesandDFactorstoConsiderinSelectinganIndexAmoneymanagerwhowishestopursueanindexingstrategymustdeterminewhichbondindextoreplicate.Thereareanumberofbondindexesfromwhichtoselect,andseveralfactorsinfluencethedecision.Thefirstistheinvestor’srisktolerance.Thesecondfactorinfluencingtheselectionofanindexistheinvestor’sobjective.FactorstoConsiderinSelectiBondIndexesThewiderangeofbondmarketindexesavailablecanbeclassifiedasbroad-basedmarketindexesandspecializedmarketindexes.Broker/dealerfirmsdevelopedandaggressivelymarketedtheirbondindexesbecauseofthepotentialprofitthatthefirmwillmakebyexecutingtradestosetupanindexedportfolioandrebalanceit.Typically,abroker/dealerchargesamoneymanagerwhowantstosetuporrebalanceanindexanominalamountforprovidingthenecessarydatabutexpectsthatthebulkofthetradeswillbeexecutedthroughitstradingdesks.BondIndexesThewiderangeofBondIndexes(continued)Thetwobroad-basedU.S.bondmarketindexesmostcommonlyusedbyinstitutionalinvestorsaretheLehmanBrothersU.S.AggregateBondIndextheSalomonSmithBarney(SSB)BroadInvestment-GradeBondIndex(BIG)Therearemorethan5,500issuesinallthreebroad-basedindexes.Theyincludeonlyinvestment-gradesecurities.Eachindexisamarket-valueweightedindex.Thepricingofthesecuritiesineachindexisasfollows.ThesecuritiesintheSSBBIGindexarealltraderpriced.Forthetwootherindexes,thesecuritiesareeithertraderpricedormodelpriced.Eachindexisbrokenintosectors.BondIndexes(continued)ThetwBondIndexes(continued)FortheLehmanBrothersU.S.AggregateBondIndex,theagencysectorincludesagencydebentures,notmortgage-backedorasset-backedsecuritiesissuedbyfederalagencies.Themortgagepass-throughsectorincludesagencypass-throughsecurities.Whatarenotincludedintheindexareagencycollateralizedmortgageobligationsandagencystrippedmortgage-backedsecurities.Thesemortgagederivativesproductsarenotincludedbecauseitwouldbedoublecountingsincetheyarecreatedfromagencypass-throughs.BondIndexes(continued)ForthIndexingMethodologiesAfteramoneymanagerhasdecidedtopursueanindexingstrategyandhasselectedanindex(broad-basedbondmarketindex,specializedmarketindex,orcustomizedbenchmark),thenextstepistoconstructaportfoliothatwilltracktheindex.Anydiscrepancybetweentheperformanceoftheindexedportfolioandtheindex(whetherpositiveornegative)isreferredtoastrackingerror.Trackingerrorhasthreesources:transactioncostsinconstructingtheindexedportfoliodifferencesinthecompositionoftheindexedportfolioandtheindexitselfdiscrepanciesbetweenpricesusedbytheorganizationconstructingtheindexandtransactionpricespaidbytheindexerIndexingMethodologiesAfteraIndexingMethodologies

(continued)Generallyspeaking,thefewerthenumberofissuesusedtoreplicatetheindex,thesmallerthetrackingerrorduetotransactionscostsbutthegreaterthetrackingerrorriskduetothemismatchofthecharacteristicsoftheindexedportfolioandtheindex.Incontrast,themoreissuespurchasedtoreplicatetheindex,thegreaterthetrackingerrorduetotransactioncostsandthesmallerthetrackingerrorriskduetothemismatchoftheindexedportfolioandtheindex.Obviously,then,thereisatrade-offbetweentrackingerrorandthenumberofissuesusedtoconstructtheindexedportfolio.IndexingMethodologies(continIndexingMethodologies

(continued)Therearethreemethodologiesfordesigningaportfoliotoreplicateanindex:thestratifiedsamplingorcellapproachtheoptimizationapproachthevarianceminimizationapproachEachapproachassumesthattheperformanceofanindividualbonddependsonanumberofsystematicfactorsthataffecttheperformanceofallbondsandonafactoruniquetotheindividualissue.IndexingMethodologies(continIndexingMethodologies

(continued)StratifiedSamplingorCellApproachUnderthestratifiedsamplingapproachtoindexing,theindexisdividedintocells,eachcellrepresentingadifferentcharacteristicoftheindex.Themostcommoncharacteristicsusedtobreakdownanindexare:durationcouponmaturitymarketsectors(Treasury,corporate,mortgage-backed)creditratingcallfactorssinkingfundfeaturesThelasttwofactorsareparticularlyimportantbecausethecallandsinkingfundfeaturesofanissuewillaffectitsperformance.IndexingMethodologies(continIndexingMethodologies

(continued)StratifiedSamplingorCellApproachSupposethatamanagerselectsthefollowingcharacteristicstopartiteinaTreasury/agency/corporatebondindex:Characteristic1:effectivedurationrange:(1)lessthanorequaltofiveyears,and(2)greaterthanfiveyearsCharacteristic2:maturityrange:(1)lessthanfiveyears,(2)betweenfiveand15years,and(3)greaterthanorequalto15yearsCharacteristic3:marketsectors:(1)Treasury,(2)agencies,and(3)corporatesCharacteristic4:creditrating:(1)AAA,(2)AA,(3)A,and(4)BBBThetotalnumberofcellswouldbeequalto2x3x3x4=72.IndexingMethodologies(continIndexingMethodologies

(continued)StratifiedSamplingorCellApproachTheobjective,then,istoselectfromalltheissuesintheindexoneormoreissuesineachcellthatcanbeusedtorepresenttheentirecell.Thetotaldollaramountpurchasedoftheissuesfromeachcellwillbebasedonthepercentageoftheindex’stotalmarketvaluethatthecellrepresents.Forexample,if40%ofthemarketvalueofalltheissuesintheindexismadeupofcorporatebonds,40%ofthemarketvalueoftheindexedportfolioshouldbecomposedofcorporatebondissues.IndexingMethodologies(continIndexingMethodologies

(continued)StratifiedSamplingorCellApproachThenumberofcellsthattheindexeruseswilldependonthedollaramountoftheportfoliotobeindexed.Inindexingaportfoliooflessthan$50million,forexample,usingalargenumberofcellswouldrequirepurchasingoddlotsofissues.Thisincreasesthecostofbuyingtheissuestorepresentacellandthuswouldincreasethetrackingerror.Reducingthenumberofcellstoovercomethisproblemincreasestrackingerrorriskofindexmismatchbecausethecharacteristicsoftheindexedportfoliomaydiffermateriallyfromthoseoftheindex.IndexingMethodologies(continIndexingMethodologies

(continued)OptimizationApproachIntheoptimizationapproachtoindexing,

themoneymanagerseekstodesignanindexedportfoliothatwillmatchthecellbreakdownandsatisfyotherconstraints,butalsooptimizesomeobjective.Anobjectivemightbetomaximizetheportfolioyield,tomaximizeconvexity,ortomaximizeexpectedtotalreturns.Constraintsotherthanmatchingthecellbreakdownmightincludenotpurchasingmorethanaspecifiedamountofoneissuerorgroupofissuers,oroverweighingcertainsectorsforenhancedindexing.IndexingMethodologies(continIndexingMethodologies

(continued)TrackingErrorMinimizationusingMultifactorRiskModelsAportfoliocanbeconstructedsuchthatitsforward-lookingtrackingerrorisminimized.Vendorsofmulti-factorriskmodelsprovidesoftwarethatpermitstheconstructionofaportfoliothatwillaccomplishtrackingerrorminimization.Theforward-lookingtrackingerrorforeachsecurityincludedintheindexisobtainedfromastatisticalanalysisofhistoricalreturns.IndexingMethodologies(continLogisticalProblemsinImplementinganIndexingStrategyAnindexerfacesseverallogisticalproblemsinconstructinganindexedportfolio.First,thepricesforeachissueusedbytheorganizationthatpublishestheindexmaynotbeexecutionpricesavailabletotheindexer.Second,therearelogisticalproblemsuniquetocertainsectorsinthebondmarket.LogisticalProblemsinImplemeLogisticalProblemsinImplementinganIndexingStrategy(continued)Considerthecorporatebondmarket.Becauseoftheilliquidityofthissectorofthebondmarket,notonlymaythepricesusedbytheorganizationthatpublishestheindexbeunreliable,butmanyoftheissuesmaynotevenbeavailable.Also,forthemortgage-backedsecuritiesmarket,theorganizationsthatpublishindexeslumpalltheseissuesintoafewhundredgenericissues.Theindexeristhenfacedwiththedifficulttaskoffindingpass-throughsecuritieswiththesameriskreturnprofilesofthesehypotheticalissues.LogisticalProblemsinImplemeLogisticalProblemsinImplementinganIndexingStrategy(continued)Recallthatthetotalreturndependsonthereinvestmentrateavailableoncouponinterest.Iftheorganizationpublishingtheindexregularlyoverestimatesthereinvestmentrate,theindexedportfoliocouldunderperformtheindexby10to15basispointsayear.LogisticalProblemsinImplemeEnhancedIndexingTheobjectiveofanenhancedindexingstrategyistoreplicatethetotalreturnperformanceofsomepredeterminedindex.Inenhancedindexing(alsocalled“indexingplus”),theobjectiveisconsistentlytoexceedthetotalreturnperformanceoftheindexbyanamountsufficienttojustifyahighermanagementadvisoryfeeandahigherlevelofriskofunderperformingtheindex.Thetotalreturnontheindexbecomestheminimumtotalreturnobjectiveratherthanthetargettotalreturn.Thusenhancedindexingbringsactivestrategiesbackintotheportfoliomanagementprocess,althoughtheyareassumedtoemployonlylow-riskstrategies.EnhancedIndexingTheobjectiveEnhancedIndexing(continued)Basically,anydepartureofaportfolio’scompositionfromthatofthebenchmarkrepresentstheriskexposureofaportfolio.Inplainvanillaindexing,theportfoliomanagerattemptstoreplicatethebenchmarkindexasbestaspossiblesubjecttothelimitationsdiscussedearlierregardingimplementation.Inenhancedindexing,thereisacontrolleddepartureoftheportfolio’scompositionfromthatofthebenchmarkindex.Asthedeparturefromthebenchmarkindexbecomesgreater,theportfoliomanagercrossesoverintotheareaofactivemanagement.Justwherethatcrossoveroccursdiffersfrommanagertomanager.EnhancedIndexing(continued)BEnhancedIndexing(continued)Anotherwaytodefineenhancedindexingisintermsoftrackingerror.Whilethereisnoindustrystandard,KennethVolpert,principalandseniorportfoliomanageratTheVanguardGroup,feelsthatundernormalconditionsatrackingerrorofoneto15basispointsperyearisreasonable.However,samplingriskhasincreasedinrecentyearsascorporateissuer“blow-ups”haveoccurredwithgreaterfrequencyandwithgreaterdownside,whichhasresultedinactualtrackingerrorbeinggreaterthanmodelpredictedtrackingerror.Manymulti-factorriskmodelsarebeingrecalibratedtocapturethisgreateridiosyncraticcreditrisk.Forenhancedbondindexing,trackingerrorrangesfrom15to50basispointsundernormalconditions.Therangeinthetrackingerrorisduetothewiderangeofenhancedindexingportfoliostrategiesthatcanbepursued.EnhancedIndexing(continued)AEnhancedIndexing(continued)AnyofthestrategiesemployedinenhancedindexingwouldinvolveonlythoseissuesintheIndex.Anotherstrategyforenhancingtotalreturnistousesecuritiesnotincludedintheindex.Forexample,thebroad-basedindexesdonotincludederivativemortgage-backedsecurities,suchascollateralizedmortgageobligations.Ifmoneymanagerspursuingenhancedindexstrategiesbelievethatderivativemortgage-backedsecuritieswilloutperformtheagencypass-throughsecuritiesintheindex,theycansubstitutetheformersecuritiesforthelatter.Orthemoneymanagermaybeabletocreatesyntheticagencypass-throughsecuritiesbyusingstrippedmortgage-backedsecurities(interest-onlyandprincipal-onlysecurities)thatwouldexhibitbetterperformanceincertaininterest-rateenvironments.EnhancedIndexing(continued)AAllrightsreserved.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmitted,inanyformorbyanymeans,electronic,mechanical,photocopying,recording,orotherwise,withoutthepriorwrittenpermissionofthepublisher.PrintedintheUnitedStatesofAmerica.Allrightsreserved.Noparto

Chapter25

Liability-DrivenStrategies

Chapter25

Liability-Driven25-33LearningObjectivesAfterreadingthischapter,youwillunderstandthetypesofliabilitiesthataninstitutionmayfacethetwoimportantdimensionsofaliability:theamountandtimingofthepaymentwhythesamefactorsthataffecttheriskoffinancialassetsalsoaffectliabilitiesthegoalsofasset/liabilitymanagementthedifferencebetweenaninstitution’saccountingsurplus,regulatorysurplus,andeconomicsurplushowassetsarehandledforaccountingpurposeshowtousethedurationofassetsandliabilitiestocalculatethesensitivityoftheeconomicsurplusofaninstitutionwheninterestrateschangewhataliability-drivenstrategyistherisksassociatedwithmismatchingportfolioassetsandliabilitieswhatimmunizingaportfoliois25-33LearningObjectivesAfterLearningObjectives(continued)Afterreadingthischapter,youwillunderstandthebasicprinciplesofanimmunizationstrategyandtheroleofdurationinanimmunizationstrategytherisksassociatedwithimmunizingaportfoliowhatacontingentimmunizationstrategyisandthekeyfactorsinimplementingsuchastrategythetwoliability-drivenstrategieswhentherearemultipleliabilities:multiperiodliabilityimmunizationandcashflowmatchingtheadvantagesanddisadvantagesofamultipleliabilityimmunizationstrategyversusacashflowmatchingstrategyhowliabilityfundingstrategiescanbeextendedtocasesinwhichtheliabilitiesarenotknownwithcertaintywhatanactive/immunizationcombinationstrategyisliability-drivenstrategiesfordefinedbenefitpensionplansLearningObjectives(continuedGeneralPrinciplesofAsset/LiabilityManagementClassificationofLiabilitiesAliability

isacashoutlaythatmustbemadeataspecifictimetosatisfythecontractualtermsofanissuedobligation.Aninstitutionalinvestorisconcernedwithboththeamountandtimingofliabilities,becauseitsassetsmustproducethecashtomeetanypaymentsithaspromisedtomakeinatimelyway.Infact,liabilitiesareclassifiedaccordingtothedegreeofcertaintyoftheiramountandtiming,asshowninExhibit25-1(seeOverhead25-5).Theclassificationassumesthattheholderoftheobligationwillnotcancelitpriortoanactualorprojectedpayoutdate.GeneralPrinciplesofAsset/LiExhibit25-1ClassificationofLiabilitiesofInstitutionalInvestorsLiabilityTypeAmountofCashOutlayTimingofCashOutlayIKnownKnownIKnownUncertainIIIUncertainKnownIVUncertainUncertainExhibit25-1ClassificationoGeneralPrinciplesofAsset/LiabilityManagement(continued)ClassificationofLiabilitiesThedescriptionsofcashoutlaysaseitherknownoruncertainareundoubtedlybroad.Whenwerefertoacashoutlayasbeinguncertain,wedonotmeanthatitcannotbepredicted.Therearesomeliabilitiesforwhich“lawoflargenumbers”makesiteasiertopredictthetimingand/oramountofcashoutlays.Thisworkistypicallydonebyactuaries,butevenactuarieshavedifficultypredictingnaturalcatastrophes,suchasfloodsandearthquakes.Justlikeassets,therearerisksassociatedwithliabilitiesandsomeoftheserisksareaffectedbythesamefactorsthataffectassetrisks.GeneralPrinciplesofAsset/LiGeneralPrinciplesofAsset/LiabilityManagement(continued)TypeILiabilityAtypeIliabilityisoneforwhichboththeamountandtimingoftheliabilitiesareknownwithcertainty.TypeIliabilities,however,arenotlimitedtodepositoryinstitutions.Amajorproductsoldbylifeinsurancecompaniesisaguaranteedinvestmentcontract(GIC).TypeIILiabilityAtypeIIliabilityisoneforwhichtheamountofcashoutlayisknownbutthetimingofthecashoutlayisuncertain.ThemostobviousexampleofatypeIIliabilityisalifeinsurancepolicy.GeneralPrinciplesofAsset/LiGeneralPrinciplesofAsset/LiabilityManagement(continued)TypeIIILiabilityAtypeIIIliabilityisoneforwhichthetimingofthecashoutlayisknownbuttheamountisuncertain.Atwo-yearfloating-rateCDinwhichtheinterestrateresetsquarterlybasedonamarketinterestrateisanexample.TypeIVLiabilityAtypeIVliabilityisoneinwhichthereisuncertaintyastoboththeamountandtimingofthecashoutlay.Probablythemostobviousexamplesareinsurancepoliciesissuedbypropertyandcasualtyinsurancecompanies.GeneralPrinciplesofAsset/LiGeneralPrinciplesofAsset/LiabilityManagement(continued)LiquidityConcernsBecauseofuncertaintyaboutthetimingand/ortheamountofthecashoutlays,aninstitutionmustbepreparedtohavesufficientcashtosatisfyitsobligations.Alsokeepinmindthattheentitythatholdstheobligationagainsttheinstitutionmayhavetherighttochangethenatureoftheobligation,perhapsincurringapenalty.Inadditiontouncertaintyaboutthetimingandamountofthecashoutlaysandthepotentialforthedepositororpolicyholdertowithdrawcashearlyorborrowagainstapolicy,aninstitutionhastobeconcernedwithpossiblereductionincashinflows.Inthecaseofadepositoryinstitution,thismeanstheinabilitytoobtaindeposits.GeneralPrinciplesofAsset/LiGeneralPrinciplesofAsset/LiabilityManagement(continued)SurplusManagementThetwogoalsofafinancialinstitutionaretoearnanadequatereturnonfundsinvested,andtomaintainacomfortablesurplusofassetsbeyondliabilities.Thetaskofmanagingfundsofafinancialinstitutiontoaccomplishthesegoalsisreferredtoasasset/liabilitymanagementorsurplusmanagement.Institutionsmaycalculatethreetypesofsurpluses:economic,accounting,andregulatory.Themethodofvaluingassetsandliabilitiesgreatlyaffectstheapparenthealthofafinancialinstitution.Unrealisticvaluation,althoughallowableunderaccountingproceduresandregulations,isnotsoundinvestmentpractice.GeneralPrinciplesofAsset/LiGeneralPrinciplesofAsset/LiabilityManagement(continued)SurplusManagementTheeconomicsurplusofanyentityisthedifferencebetweenthemarketvalueofallitsassetsandthemarketvalueofitsliabilities;thatis,theeconomicsurpluscanbeexpressedas

economicsurplus=marketvalueofassets–presentvalueofliabilitiesIfinterestratesrise,boththeassetsandliabilitiesdecline,sotheeconomicsurpluscanincrease,decrease,ornotchange.Ifthedurationoftheassetsisgreaterthanthedurationoftheliabilities,theeconomicsurpluswillincreaseifinterestratesfall.Theneteffectonthesurplusdependsonthedurationorinterest-ratesensitivityoftheassetsandliabilities,soitisimperativethatportfoliomanagersbeabletomeasurethissensitivityforallassetsandliabilitiesaccurately.GeneralPrinciplesofAsset/LiGeneralPrinciplesofAsset/LiabilityManagement(continued)SurplusManagementAccountingsurplusissurplusofassetsoverliabilitiesasreportedinfinancialstatementsbasedongenerallyacceptedaccountingprinciples(GAAP)accounting.Institutionalinvestorsmustprepareperiodicfinancialstatementsthatincludethereportingofassetsandliabilities.Withrespecttothefinancialreportingofassets,therearethreepossiblemethodsforreporting:amortizedcostorhistoricalcost,marketvalue,orthelowerofcostormarketvalue.FASB115specifieswhichofthesethreemethodsmustbefollowedforassets.Specifically,theaccountingtreatmentrequiredforasecuritydependsonhowthesecurityisclassified.GeneralPrinciplesofAsset/LiGeneralPrinciplesofAsset/LiabilityManagement(continued)SurplusManagementTherearethreeclassificationsofinvestmentaccounts:heldtomaturity,availableforsale,andtrading.Theheld-to-maturityaccountincludesassetsthattheinstitutionplanstoholduntiltheymature.Anassetisclassifiedasintheavailable-for-saleaccountiftheinstitutiondoesnothavetheabilitytoholdtheassettomaturityorintendstosellit.Anassetthatisacquiredforthepurposeofearningashort-termtradingprofitfrommarketmovementsisclassifiedinthetradingaccount.Forallassetsintheavailable-for-saleandtradingaccounts,marketvalueaccountingisused.GeneralPrinciplesofAsset/LiGeneralPrinciplesofAsset/LiabilityManagement(continued)SurplusManagementUnderFASB115,theaccountingtreatmentforanyunrealizedgainorlossdependsontheaccountinwhichtheassetisclassified.Specifically,anyunrealizedgainorlossisignoredforassetsintheheld-to-maturityaccount.Thus,forassetsinthisaccountthereisnoaffectonreportedearningsortheaccountingsurplus.Fortheothertwoaccounts,anyunrealizedgainorlossaffectstheaccountingsurplusasdescribedpreviously;however,thereisadifferenceastohowreportedearningsareaffected.Forassetsclassifiedintheavailable-for-saleaccount,unrealizedgainsorlossesarenotincludedinreportedearnings;incontrast,forassetsclassifiedinthetradingaccount,anygainsorlossesareincludedinreportedearnings.Exhibit25-2(seeOverhead25-15)summarizestheaccountingtreatmentofassetsassetforthbyFASB115.GeneralPrinciplesofAsset/LiExhibit25-2SummaryofKeyProvisionsofFASB115AccountClassificationAccountingMethodforAssetsWillAffectSurplusWillAffectReportedEarningsHeldtomaturityHeldtomaturityNoNoHeldtomaturityHeldtomaturityYesNoHeldtomaturityHeldtomaturityYesYesExhibit25-2SummaryofKeyPImmunizationofaPortfoliotoSatisfyaSingleLiabilityAnimmunizationstrategyreferstotheinvestmentoftheassetsinsuchawaythattheexistingbusinessisimmunetoageneralchangeintherateofinterest.SupposethatalifeinsurancecompanysellsaGICthatguaranteesaninterestrateof6.25%everysixmonths(12.5%onabond-equivalentyieldbasis)for5.5years(11six-monthperiods).Alsosupposethatthepaymentmadebythepolicyholderis$8,820,262.Then,thevaluethatthe