Asked by Nathan Seifner on Jul 07, 2024
Verified
Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because:
I. The portfolio must be rebalanced every time interest rates change.
II. The portfolio must be rebalanced over time even if interest rates don't change.
III. Convexity implies duration-based immunization strategies don't work.
A) I only
B) I and II only
C) II only
D) I, II, and III
Duration-based Immunization
A strategy used in portfolio management to minimize the risk of interest rate fluctuations by matching the duration of assets and liabilities.
Rebalanced
The process of realigning the weightings of a portfolio of assets to maintain an original or desired level of asset allocation or risk.
- Understand the concept and importance of immunization in bond portfolio management.
Verified Answer
HO
Hilula OkanulaJul 09, 2024
Final Answer :
B
Explanation :
Immunization of coupon-paying bonds requires ongoing portfolio management to maintain the desired duration and convexity targets, which may need adjustment due to changing interest rates and market conditions. Therefore, option I is correct. Additionally, even in the absence of interest rate changes, the portfolio must be rebalanced over time to account for the cash flows from the coupons paid by the bonds, making option II also correct. Option III is incorrect because duration-based immunization strategies can still be effective, although convexity can provide additional protection against interest rate risk.
Learning Objectives
- Understand the concept and importance of immunization in bond portfolio management.
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