Effect of Duration Shift on Immunization Strategy

Hard Liability-driven Strategies Immunization

Consider a pension fund that has liabilities maturing in 5 years. The fund currently holds a portfolio of bonds with an average duration of 4.5 years and a market value of $1 million. The fund manager is considering a shift to a new bond portfolio that has an average duration of 5.5 years, which is expected to enhance the fund's immunization strategy.

Immunization is a strategy where the duration of assets matches the duration of liabilities to minimize the risk of interest rate fluctuations affecting the funding status of the pension obligations. The manager is aiming to align the new portfolio in such a way that it appropriately matches or surpasses the duration of the liabilities, considering potential shifts in interest rates.

Which of the following best describes the effects of the proposed shift to the new bond portfolio on the pension fund's immunization strategy?

The proposed shift will enhance immunization by increasing duration, thus better matching the liabilities.

The proposed shift may jeopardize immunization because it increases the duration of assets beyond the duration of liabilities.

The proposed shift has no effect on immunization since only the market value of the assets matters.

Hint

Submitted11.9K

Correct10.8K

% Correct90%