Question

Immunization is a strategy of shielding off interest rate risk of a bond or a bond portfolio using the concept of duration.

b Discuss the pros and cons of using immunization to shield off the interest rate risk of a bond or a bond portfolio.

Answer 1

Pros of immunization technique are

Firstly it protects the bond portfolio from any change in interest rate that is interest risk is eliminated. Thus this guarantees the firm to meet its liabilities whatever be the interest rate.

Cons of this technique include that it limits the growth of bond portfolio that is bond portfolio value doesn't changes even if interest rates falls . As fall in interest rates should increase bond portfolio value but annimmunized portfolio value will adjust itself such that their won't be net change in portfolio value