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What does it mean to immunize yourself from interest rate risk using duration?  How would you do...

What does it mean to immunize yourself from interest rate risk using duration?  How would you do it with a coupon bond?  Zero coupon bond?

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Answer #1

Bond immunization a technique in which the risk related with the interest rate fluctuation of the bond will be matched with the duration of the investment of Bond holder.

So, we will be trying to match the investment duration with the duration of the bond and it will mean that the fluctuation can be managed in regards to interest rate and there will be a bond immunization.

I can do it with a coupon Bond by matching the duration of the bond with the investment horizon and it can also be done with the zero coupon Bond because zero coupon Bond last payment is highly sensitive to the interest rate changes and I will be trying to match the duration of the zero coupon Bond with the investment horizon of the investor.

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