Since the approach of the construction is simple we can concentrate on risk analysis, which is the main topic of the project. Among them are keintz and stickneys 1980 immunization of pension funds and sensitivity to actuarial assumptions, fong and vasiceks 1984 a risk minimizing strategy for portfolio immunization, leibowitzs 1986b the dedicated bond portfolio in pension fundspart ii. Some special shocks on the interest rate are analyzed, and general conditions about immunization are. In this case, the portfolio manager may seek to invest in appropriate. Jun 25, 2019 immunization, also known as multiperiod immunization, is a strategy that matches the durations of assets and liabilities, thereby minimizing the impact of interest rates on the net worth. Yield curve slope and expectations about future spot rates.
The yield curve and bond portfolio immunization g%ar villazon u. Parametric immunization seeks to make the sensitivities of the hedged portfolio price with respect to. An immunizationhedging investment strategy for a future portfolio of. It is usually possible to immunize a portfolio against the most prevalent risk factors. Oct 10, 2019 from the 1980s into the 2010s, bond mutual funds have enjoyed a generally favorable environment of increasing prices. If interest rates applicable for discounting fall rise, both va and vl will increase decrease.
Bond immunization is an investment strategy used to minimize the interest rate risk of bond investments by adjusting the portfolio duration to match the investors investment time horizon. Calle madrid, 126 28903 getafe spain fax 341 6249875. Nov 04, 20 this feature is not available right now. Duration and portfolio immunization bonds finance bond. A bond portfolio manager in a pension fund is designing a bond.
Pdf risk factor analysis and portfolio immunization in. Oct 14, 2018 immunization of bond is a process of creating a bond portfolio through which the interest rate risk and reinvestment risk can be either eliminated or minimized. Immunization, also known as multiperiod immunization, is a strategy that matches the durations of assets and liabilities, thereby minimizing the impact of. We begin with an overview of the investment management process and the factors to consider in the selection of a. Redington immunization is a strategy for portfolio management intended to. A portfolio is immunized when its duration equals the investors time horizon. Canada bonds, our main conclusion is that durationmatching strategies. Fixed income portfolio management interest rate sensitivity. Immunization, also known as multiperiod immunization, is a strategy that matches the durations of assets and liabilities, thereby minimizing the impact of interest rates on the net worth. Oct 19, 2016 we propose an integrated bond portfolio optimization model based on the popular cashflow matching and immunization strategies. Immunize your bond portfolio against interest rate risk. Based on findings derived from a data base of default and optionfree government of.
Pdf on risk minimizing strategies for defaultfree bond. Nov 16, 2016 optimize your bond portfolio through cash flow matching dedication strategy. As a trivial case, a portfolio consisting of zero coupon bonds maturing at the end of the investor holding period is an immunised portfolio free of immunization risk. When immunization is not possible, capital losses are measured. In the case that the zerocoupon yield curve belongs to a fixed lowdimensional manifold, the problem is widely known as parametric immunization. According with the traditional immunization theory, a. Consider a zero coupon bond that makes one payment of c at the end of n periods. Lecture 11 duration, convexity and immunisation reading. Risk factor analysis and portfolio immunization in the italian bond market. When the duration is applied to bond portfolio management and, specially, when it is used to determine the best immunization policy for the accumulated value andor for the obtained yield rate, there are some restrictive hypothesis.
Immunization can be done in a portfolio of a single asset type, such as government bonds, by creating long and short positions along the yield curve. In this case, the portfolio manager may seek to invest in appropriate duration coupon bonds to hedge interest rate risk. Kaufman, and chulsoon khang in recent years, academicians and practitioners have been using the concept of duration more frequently in the analysis of debt securities. Durationmatching strategies call for matching portfolio duration to the length of the planning horizon. Fabozzi bond markets and strategies sixth edition chapter 22. On risk minimizing strategies for defaultfree bond portfolio immunization. Presently a number of institutional bond funds are immunizing.
As in medicine, the use of the word immunization refers to reducing risks through preventative action. In this example, the appropriate investment is in fiveyear duration couponbearing bonds. Bond portfolio immunization, inflation, and the fisher equation jstor. Risk management topic four bond portfolio management and. Downward sloping yield curve implies that the market is expecting lower spot rates in the future. Pdf risk factor analysis and portfolio immunization in the. The trick to immunization therefore is to find bonds where the change in interest on interest exactly offsets the change in price when rates change. Even the beginning investor can notice how interest rates were incredibly. Bond portfolio management interest rate risk sensitivity inverse relationship between prices and yields. The empirical analysis, run on the german treasury bond market from january 2000 to december 2010, suggests that. Based on findings derived from a data base of defaultand optionfree government of canada bonds, our main conclusion is that durationmatching strategies succed in reducing interest rate risk more effectively than strategies that call for matching bond maturity to the length of the planning horizon. T 1 c yt f t, where y ytm when yields change, bond prices will change. This paper provides additional evidence on the usefulness of duration as a strategy tool by developing a two.
Still, mutual fund investors are wise to learn how to build their own diversified fixedincome portfolio, which will include choosing individual bonds. Topic one bond portfolio management and immunization. Bond portfolio immunization, immunization risk and. Open the bond immunization program to generate the examples in section iv, and to construct your own. Risk management topic four bond portfolio management and immunization 4. Bond portfolio immunization, immunization risk and idiosyncratic risk article pdf available november 2008 with 1,059 reads how we measure reads. A portfolio is said to be immunized, if it guarantees a return at m, regardless of changes in interest rates. Immunization portfolio immunization portfolio immunization an investment strategy that tries to protect the expected yield from a security or portfolio of securities by acquiring those securities whose duration equals the length of the investors planned holding period. Fabozzi bond markets and strategies sixth edition chapter 22 active bond portfolio management strategies chapter summary this chapter and the two that follow discuss bond portfolio management strategies. Pdf bond portfolio immunization, immunization risk and. Immunization of bond is a process of creating a bond portfolio through which the interest rate risk and reinvestment risk can be either eliminated or minimized. A nonparametric approach to bond portfolio immunization. In this model we assume that the duration of the bond is known.
The underlying mathematical program, not only minimizes the initial required capital for the creation of the least cost bond portfolio, satisfying the connected series of liabilities, but also handles the uncertainty of parallel and symmetric shifts on the term. Bond immunization is a strategy used to reduce interest rate risk in a bond portfolio. Koopmans pointed out the concept of bond portfolio immunization by matching the. Readings and suggested practice problems bkm, chapter 16, sections 16. Optimize your bond portfolio through cash flow matching. Fixed income portfolio management interest rate sensitivity, duration, and convexity passive bond portfolio management active bond portfolio management interest rate swaps 1 interest rate sensitivity, duration, and convexity tbond price. Bond portfolio immunization, immunization risk and idiosyncratic risk. We consider the problem of short term immunization of a bond like obligation with respect to changes in interest rates using a portfolio of bonds. Pdf on nov 1, 2008, antonio diaz and others published bond portfolio immunization, immunization risk and idiosyncratic risk find, read and cite all the. The price of a bond is more responsive to a fall in the yield than to a rise. If the price has fallen it implies the yield over the remainder of the bonds lifetime has risen capital appreciation. Chapter 11 duration, convexity and immunization section 11.
Additionally, in practice, portfolio managers do not usually form an optimal bond portfolio since there 3. An integrated matchingimmunization model for bond portfolio. Jul 21, 2019 learn more about popular passive, quasipassive, immunization, and active bond strategies for managing a bond portfolio and how you can put them to work for you. This can be done by setting the duration of the portfolio equal to the investors time horizon and making sure the initial present value of the bond equals the present value of the liability in. Immunization of bonds ca final sfm new syllabus classes. Open the bond immunization program to generate the examples in section iv, and to construct your own examples of targetdate immunization. Consider the value of a bond portfolio consisting of one 7year annual. Upward sloping yield curve is consistent with the market expecting higher or lower spot rates in the future. Treasury bonds with different coupons and years to maturity are deliverable against a contract raises the. The goal of immunization is to offset these two changes to an investors bond value, leaving its worth unchanged. Canadian tests maturity matching strategy 1 is the closest competitor to duration matching and consists of buying a fiveyear bond maturity equal to planning horizon and holding it to maturity. Maxmin strategies are also studied, as well as their relations with immunized ones.