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Immunization Strategies for Funding Multiple Liabilities

Published online by Cambridge University Press:  06 April 2009

G. O. Bierwag ,
George G. Kaufman  and
Alden Toevs
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Extract

A number of recent papers have shown that it is possible for an investor to immunize a portfolio of default and option-free coupon bonds so that the return realized over a given planning period will never be less than that promised at the time the bonds were purchased. In this way, a future fixed dollar liability may be discharged with certainty by acquiring an asset portfolio with a market value equal to the present value of the liability and setting its appropriate duration equal to the time remaining to the date of discharge. However, most investors have more than one liability to discharge. In his seminal article in 1952, F. M. Redington showed that a stream of liabilities may be immunized if an asset portfolio having the same present value as the liabilities is selected so that:

1. its duration is equal to the duration of the liabilities; and

2. “the spread of the value of asset-proceeds about the mean term (duration) should be greater than the spread of the value of the liability” ([16], p. 191).

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 18 , Issue 1 , March 1983 , pp. 113 - 123
Copyright
Copyright © School of Business Administration, University of Washington 1983

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References

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