Understanding Immunization in Fixed Income Portfolio Management

Easy Liability-driven Strategies Immunization

As a fixed income portfolio manager, you are tasked with implementing an immunization strategy for a pension fund's liabilities, which are expected to arise in 5 years. You have analyzed various bonds with differing durations and coupon payments.

Your goal is to manage interest rate risk such that the present value of the bond portfolio equals the present value of the liabilities at the relevant horizon. Which of the following statements accurately describes a key principle of immunization that should be considered in your strategy?

Immunization requires that the total market value of the bonds equals the total market value of the liabilities.

Immunization positions the portfolio to have the same duration as the liabilities.

Immunization allows for any mismatch in cash flow timing between assets and liabilities.

Hint

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