Duration Matching for Pension Liabilities

Medium Liability-driven Strategies Duration Matching

As a fixed income portfolio manager for a pension fund, you are tasked with implementing a liability-driven investment strategy to match the expected benefit payments of the fund over the next 10 years. The fund's liabilities are primarily in the form of fixed annual pension payouts, which are sensitive to interest rate fluctuations. You are considering a series of bonds with varying maturities and coupon payments to construct a portfolio that aligns with the duration of the liabilities.

In this context, which of the following strategies would best achieve your goal of duration matching with respect to the pension fund’s liabilities?

Invest solely in long-term zero-coupon bonds that mature in 10 years.

Create a bond ladder consisting of bonds with maturities that coincide with the timing of the expected benefit payments.

Hold a mix of short-term bonds and equities to achieve a diversified portfolio.

Hint

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