Hostname: page-component-745bb68f8f-l4dxg Total loading time: 0 Render date: 2025-01-28T03:16:49.846Z Has data issue: false hasContentIssue false
  • English
  • Français

Bond Immunization When Short-Term Interest Rates Fluctuate More Than Long-Term Rates

Published online by Cambridge University Press:  06 April 2009

Chulsoon Khang
Get access Rights & Permissions [Opens in a new window]

Extract

In an important article in 1971, Fisher and Weil [4] demonstrated that it is possible to immunize a portfolio of default-free coupon bonds against unexpected interest rate changes so that at the end of the planning period the investor will realize at least the return expected at purchase. Immunization may be achieved by constructing a portfolio whose average duration is equal to the length of the investor's planning period. The computation of duration that produces immunization is dependent on the nature of the assumed stochastic interest rate shocks. Fisher and Weil derive the duration that will produce immunization for additive shifts in the yield curve under instantaneous compounding, e.g., g(t) + λ where g(t) is the instantaneous interest rate at time t and λ is a random shift parameter.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 14 , Issue 5 , December 1979 , pp. 1085 - 1090
Copyright
Copyright © School of Business Administration, University of Washington 1979

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Bierwag, G. O. “Immunization, Duration, and the Term Structure of Interest Rates.” Journal of Financial and Quantitative Analysis, Vol. 12, No. 5 (12 1977), pp. 725–742.CrossRefGoogle Scholar
[2]Bierwag, G. O., and Kaufman, George G.. “Coping With the Risk of Interest-Rate Fluctuations: A Note.” Journal of Business, Vol. 50, No. 3 (07 1977), pp. 364–370.CrossRefGoogle Scholar
[3]Bierwag, G. O.; Kaufman, G. G.; and Khang, C.. “Duration and Bond Portfolio Analysis.” Journal of Financial and Quantitative Analysis (11 1978).CrossRefGoogle Scholar
[4]Fisher, L., and Weil, R. L.. “Coping With the Risk of Interest-Rate Fluctuations: Returns to Bondholders from Naive and Optimal Strategy.” Journal of Business, Vol. 44, No. 3 (07 1971), pp. 408–431.CrossRefGoogle Scholar
[5]Cox, J. C; Ingersol, J.; and Ross, S.. “Duration and the Measurement of Basis Risk.” Journal of Business (01 1979).CrossRefGoogle Scholar
[6]Kaufman, G. “Measuring Risk and Return for Bonds: A New Approach.” Journal of Bank Research, Vol. 9, No. 2 (Summer 1978), pp. 82–90.Google Scholar
[7]Malkiel, B. G.The Term Structure of Interest Rates: Expectations and Behavior Patterns. Princeton, N. J.: Princeton University Press (1966).Google Scholar
[8]Yawitz, J. B.; Hempel, G. H.; and Marshall, W. J.. “A Risk-Return Approach to the Selection of Optimal Government Bond Portfolios.” Financial Management (Autumn 1976), pp. 3645.CrossRefGoogle Scholar