Unformatted text preview: bonds falls.
– Reinvestment rate risk - When interest rates
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
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
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- Spring '14
- YTM, Bond duration, duration