Immunization Strategies for Fixed Income Liabilities

A portfolio manager is responsible for managing a fixed income portfolio with a liability that will mature in 5 years, requiring a payment of $1,000,000. The current interest rate environment is marked by a yield of 3% for bonds with similar maturities. The manager is considering various immunization strategies to ensure that the portfolio can meet its liability without being adversely affected by changes in interest rates.

The manager has the option to construct a portfolio of zero-coupon bonds, consider a bond laddering strategy, or utilize a combination of coupon-paying bonds to achieve immunization. Discuss the concept of immunization, the specific techniques the manager could utilize to effectively immunize the portfolio against interest rate risk, and the trade-offs associated with these approaches.