The ability to immunize a bond portfolio is very desirable for bond portfolio managers in some instances.

Question:

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.

Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...