The ability to immunize a bond portfolio is very desirable for bond portfolio managers in some instances.
a. Discuss the components of interest rate risk. Assuming a change in interest rates over time, explain the two risks faced by the holder of a bond.
b. Define immunization, and discuss why a bond manager would immunize a portfolio.
c. Explain why a duration-matching strategy is a superior technique to a maturity matching strategy for the minimization of interest rate risk.
d. Explain in specific terms how you would use a zero-coupon bond to immunize a bond portfolio. Discuss why a zero-coupon bond is an ideal instrument in this regard.
e. Explain how contingent immunization, another bond portfolio management technique, differs from classical immunization. Discuss why a bond portfolio manager would engage in contingent immunization.

  • CreatedDecember 17, 2014
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