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Floating Rate Notes and Immunization

Published online by Cambridge University Press:  06 April 2009

Don M. Chance
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Extract

Recent developments in the literature on bond portfolio management have identified conditions under which uncertainty of the investment return attributable to interest rate changes is eliminated. Such a strategy, called immunization, is achieved when the duration of the bond or portfolio of bonds is equal to the investor's holding period. Duration is defined as a weighted average time to maturity and was originally developed by Macaulay [13]. The condition under which immunization is obtained by setting duration equal to holding period was derived by Redington [14] and Fisher and Weil [10] and further developed by Bierwag and Kaufman [4], Bierwag [2], and Khang [12]. Bierwag [3] has provided a concise summary of the theory of immunization, and Bierwag and Khang [7] show that immunization is equivalent to selecting a strategy in which the worst possible return is maximized, i.e., a minimax strategy. Bierwag [1] examines immunization under multiple shocks to the term structure and Bierwag, Kaufman, and Toevs [6] extend the concept to a general equilibrium, two-state Arrow-Debreu world.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 18 , Issue 3 , September 1983 , pp. 365 - 380
Copyright
Copyright © School of Business Administration, University of Washington 1983

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References

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