Question: 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.

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.

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a Interest rate risk comprises two risks a price risk and a coupon reinvestment risk Price risk represents the chance that interest rates will differ from the rates the manager expects to prevail betw... View full answer

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