Immunization in Liability-Driven Investment Strategies

Immunization is a vital concept in fixed income portfolio management, especially in the context of liability-driven investment strategies. This technique aims to protect the portfolio's value against interest rate fluctuations, ensuring that specific liabilities can be met as they arise.

Given the following scenario: A pension fund has an obligation to pay $1 million in 10 years. The fund manager must determine an appropriate bond portfolio structure that provides enough capital to meet this future liability. Discuss the principle of immunization and how it can be applied to structure a bond portfolio that effectively covers this liability.