Tuesday, 23 February 2010

Immunizing Bond Porfolios

Fabozzi Chapter 19 talks about immunization of bond portfolios, i.e. hedging out the interest rate risk and the reinvestment risk. Matching durations for bonds of different maturities exposes you to reinvestment risk (the risk that you cannot invest the coupons at the IRR). A passive strategy is one that does not require rebalancing.

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