- How do you calculate duration?
- What is the difference between bond immunization and cash flow matching?
- How does duration matching work?
- Why is Redington Immunisation a valuable investment tool?
- What is immunization strategy?
- What does Bond convexity mean?
- Why is rebalancing necessary for immunizations?
- What is the meaning of modified duration?
- What are matching assets?
- What is portfolio immunization?
- What do we do to value the bond price?
- What is interest rate risk of a bond?
How do you calculate duration?
The formula for the duration is a measure of a bond’s sensitivity to changes in the interest rate, and it is calculated by dividing the sum product of discounted future cash inflow of the bond and a corresponding number of years by a sum of the discounted future cash inflow..
What is the difference between bond immunization and cash flow matching?
Immunization aims to balance the opposing effects interest rates have on price return and reinvestment return of a coupon bond. … Cash flow matching relies on the availability of securities with specific principals, coupons, and maturities to work efficiently.
How does duration matching work?
Duration-matching is a strategy used to manage interest rate risk that involves matching the duration of the loan with the duration of the asset. Duration is the weighted-average maturity of the cash flows of the debt or asset.
Why is Redington Immunisation a valuable investment tool?
In finance, interest rate immunisation, as developed by Frank Redington is a strategy that ensures that a change in interest rates will not affect the value of a portfolio. … Other types of financial risks, such as foreign exchange risk or stock market risk, can be immunised using similar strategies.
What is immunization strategy?
Immunization, also known as multi-period immunization, is a risk-mitigation strategy that matches the duration of assets and liabilities, minimizing the impact of interest rates on net worth over time.
What does Bond convexity mean?
Convexity is a measure of the curvature in the relationship between bond prices and bond yields. Convexity demonstrates how the duration of a bond changes as the interest rate changes. If a bond’s duration increases as yields increase, the bond is said to have negative convexity.
Why is rebalancing necessary for immunizations?
While an increase in rates hurts a bond’s price, it helps the bond’s reinvestment rate. … Maintaining an immunized portfolio means rebalancing the portfolio’s average duration every time interest rates change, so that the average duration continues to equal the investor’s time horizon.
What is the meaning of modified duration?
Modified duration is a formula that expresses the measurable change in the value of a security in response to a change in interest rates. Modified duration follows the concept that interest rates and bond prices move in opposite directions.
What are matching assets?
Using matching assets To help achieve this, many schemes hold ‘matching assets’ in order to manage investment risk relative to the liabilities. … reduce the volatility in the funding level by investing in assets which respond to changes in interest rates and / or inflation in the same way as the liability value does.
What is portfolio immunization?
Immunization is a dedicated-portfolio strategy used to manage a portfolio with the goal of making it worth a specific amount at a certain point, usually to fund a future liability. Immunization is one of two kinds of dedicated-portfolio strategies (cash-flow matching is the other).
What do we do to value the bond price?
Bond valuation, in effect, is calculating the present value of a bond’s expected future coupon payments. The theoretical fair value of a bond is calculated by discounting the future value of its coupon payments by an appropriate discount rate.
What is interest rate risk of a bond?
Interest rate risk is the risk that changes in interest rates (in the U.S. or other world markets) may reduce (or increase) the market value of a bond you hold. Interest rate risk—also referred to as market risk—increases the longer you hold a bond. … In fact, you may have to sell your bond for less than you paid for it.