immunization

Immunization

A strategy that matches the durations of assets and liabilities, thereby minimizing the impact of interest rates on the net worth.

Notes:

For example, large banks must protect their current net worth, whereas pension funds have the obligation of payments after a number of years. These institutions are both concerned about protecting the future value of their portfolios and therefore have the problem of dealing with uncertain future interest rates. By using an immunization technique, large institutions can protect (immunize) their firm from exposure to interest rate fluctuations. A perfect immunization strategy establishes a virtually zero-risk profile in which interest rate movements have no impact on the value of a firm.

Also known as multiperiod immunization.

See also: Duration, Interest Rate, Reinvestment Risk, Risk

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Immunization

The construction of an asset and a liability match that benefits from offsetting changes in value.

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immunization

A technique of investing in bonds such that the portfolio's target return is protected against interest rate fluctuations. Changes in returns at which cash flows can be reinvested are offset by changes in the value of the securities in the portfolio. See also bullet immunization.