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Bond Immunization When Short-Term Interest Rates Fluctuate More Than Long-Term Rates

Published online by Cambridge University Press:  06 April 2009

Chulsoon Khang
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Extract

In an important article in 1971, Fisher and Weil [4] demonstrated that it is possible to immunize a portfolio of default-free coupon bonds against unexpected interest rate changes so that at the end of the planning period the investor will realize at least the return expected at purchase. Immunization may be achieved by constructing a portfolio whose average duration is equal to the length of the investor's planning period. The computation of duration that produces immunization is dependent on the nature of the assumed stochastic interest rate shocks. Fisher and Weil derive the duration that will produce immunization for additive shifts in the yield curve under instantaneous compounding, e.g., g(t) + λ where g(t) is the instantaneous interest rate at time t and λ is a random shift parameter.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 14 , Issue 5 , December 1979 , pp. 1085 - 1090
Copyright
Copyright © School of Business Administration, University of Washington 1979

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References

REFERENCES

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