Two types of interest rate risk price risk when

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Unformatted text preview: bonds falls. bonds – Reinvestment rate risk - When interest rates Reinvestment fall, your ability to reinvest the interest payments gets worse. payments Classical immunization To eliminate interest rate risk, select a portfolio of bonds such that the duration of the portfolio equals the investment horizon (desired holding period). This makes price risk and reinvestment rate risk cancel each other out. The duration of a portfolio is the weighted average The of the durations of the bonds in the portfolio. Difficulties with classical immunization: Duration changes when yields change. As time goes by, the investment horizon gets shorter more quickly than the duration does unless the bond is a zero-coupon bond....
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