- 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.