Managing Interest Rate Risk in a Bond Portfolio

As a fixed income portfolio manager, it is essential to understand the impact of interest rate risk on the performance of bond portfolios. Interest rate risk arises from fluctuations in interest rates, which can lead to changes in the value of fixed income securities. For example, when interest rates rise, the prices of existing bonds typically fall, and vice versa.

In this context, you are responsible for managing a bond portfolio consisting of various government and corporate bonds. Explain how you would assess and manage interest rate risk within this portfolio. Consider strategies you might employ, such as duration matching, immunization, or the use of interest rate derivatives.