KIC000071 - What is Immunization? The basic idea behind...

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What is Immunization? The basic idea behind immunization is that you want to construct your investment portfolio 50 that its cash flow matches the liabilities even if interest rates change. You have a target value and yield for the liabilities. What do you need to worry about if interest rates change? 2 key objectives: '::,1n o,U-- pllJ'\ oc\ 1) Match duration of portfolio to li~itie5 2) PY of C<lSM flow from portfolio equal5 PV of future liabilitie~ What happens to duration when yield changes? Immunization of a Portfolio to Satisfy a Single Liability .:- AIJ. immunization strategy refers to tin: investment of the assets in such a way thal the existing business is immune to a general change in the rate of interest. -+ Suppose that a life insurance- company sells a Ole that guarantees an interest rate of6.25% every six mouths (12.5% ODIIbond- equivalcrJt yield basis) for 5.5 years (11 six-month periods). Also suppose that the payment made by the policyholder is $8,820,262. -+
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KIC000071 - What is Immunization? The basic idea behind...

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