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Bond Immunization: Duration and Duration Matching

Bond Immunization

Bond Immunization: Duration and Duration Matching

Duration represents the approximate period—a number of years—required for cash flows from a bond to recoup its listed face value (par value) price.

Duration matching—a type of immunization strategy used to “match” bond duration value with the duration value for future investment liabilities (debt obligations assumed in repayment).

Answer: Immunizing interest rate risk with matching duration assumes:

(1) Knowledge of the bond’s duration in a portfolio; and
(2) Adjusting portfolio’s duration to equal investment time horizon.

Here, the facts provide a 7-year duration for a $1,000 present value. To synchronize the portfolio duration with a 7-year obligation, we may immunize by selecting bonds that equal $1,000 in seven years regardless of interest rate. We may achieve this outcome in one of two ways:

Therefore, these two options might immunize the interest rate risk through duration matching—assuming we can synchronize our 7-year obligation with a 7-year YTM bond duration, while simultaneously ensuring 1,000 present value equals our expected return.

[i] Morning Star, Inc., “What is Bond Immunization?” p.2, 2015,

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