Immunization by Duration Matching

Philosophy:
Duration of Asset portfolio= Duration of Liability portfolio

Example:

imagine a fund manager facinga liability of $1000000 two years from now. Her investment options are in a 3yr, 8% annualvania
How can she create a portfolio using these two assets based on the above principle? Conmsider the yiled curve to be flat at 10

Solution:
Liability
Amount $1,000,000.00
Duration 2
Asset
3yr Bond 1yr Bond
Maturity(yr) 3 1
Coupon 8% 7%
Yield 10% 10%
Price ₹ 95.03 ₹ 97.27
Duration 2.7773561037 1
Portfolio weight 56.263% 43.737%

Total investment $826,446.28

Investment in each $464,986.32 $361,459.96
No of Bonds 4893.24 3715.94

Now let us examine the portfolio future value for three different yield scenario , in case of parallel shif
Total Future Value
Scenario 3yr Bond 1yr Bond Portfolio
9% $566,649.58 $433,390.49 $1,000,040.07
10% $562,633.45 $437,366.55 $1,000,000.00
11% $558,696.74 $441,342.61 $1,000,039.35
ons are in a 3yr, 8% annualvanialla bond or 7%, 1yr vanilla bond.
r the yiled curve to be flat at 10%