Immunisation
Matching a bond's duration to the horizon so the price effect and the reinvestment effect of a rate change cancel, leaving the original yield realised.
Where you will meet it
Immunisation appears in 5 learning outcomes on the CFA syllabus. A few of them:
- Explain the investment horizon and the gap in duration relative to it
“Assuming a single parallel shift in yields soon after purchase, at a horizon equal to the bond's Macaulay duration the two effects cancel and the realised return equals the original yield to maturity, which is the immunisation result.”
- Assess ways of funding one future liability with a bond portfolio
“The classic approach is immunisation.”
- Explain why portfolios hold fixed income and the ways fixed-income mandates can be categorised
“Liability-based mandates aim to fund known obligations, as in immunisation or cash flow matching for a pension or insurer.”
- Contrast approaches to one liability with approaches to a schedule of liabilities, and the different ways each can be implemented
“For one liability, immunisation matches Macaulay duration to the horizon.”
Practise it
Practise immunisation until it is automatic: questions that explain every wrong option.
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