Immunization

Immunization is a fixed-income portfolio management strategy that aims to protect against interest rate risk by matching the duration of assets and liabilities. The goal is to ensure that changes in interest rates do not significantly impact the portfolio’s value or the ability to meet future liabilities. This strategy is often used by pension funds and insurance companies to safeguard their portfolios against fluctuations in interest rates, ensuring that assets will cover future obligations regardless of market changes.

Example

A pension fund uses immunization by matching the duration of its bond investments to the expected payout timeline for pension liabilities, minimizing the impact of interest rate changes on the fund’s ability to meet its obligations.