Hello,
Quick question here:
In a barbell immunization strategy, with bond maturities widely dispersed around the liability horizon, do we assume that the investor sells the longer-maturity bond (which hasn’t matured yet at liability horizon) at the liability due date in order to meet the liability?
Or, do the other cash flows meet the liability? Thanks
So lets say that at the far end of the barbell you are holding 8 year, 9 year, and 12 year bonds and your liability is actually at year 10. Then you could technically hold the 8 and 9 year bonds to maturity and reinvest their proceeds in short-term instruments at the prevailing rates at the time, as your liability is not quite due yet. As for the longer bond (12 year) it can be sold earlier (i.e. in year 10) and its proceeds used to payoff the year 10 obligation as well (so on the latter bond there is higher market value risk while on the earlier ones there is higher reinvestment risk). At least this is how I understand it, can someone confirm my understanding or correct me accordingly? haha, thanks guys, and great question jbct91!
I won’t bother explaining because s2000magician is the bond guy and in case I mess up I don’t want him making me look bad.
hahaha touché, I gave it a go, let’s see if I get clobbered to death ;p
Very good.
The one thing that I would add is that instead of selling the 12-year bond in year 10 to pay off the liability, you could borrow the additional cash needed to pay off the liability, then pay that off in 2 years when the bond matures. You’d want to compare the cost of borrowing the money to the yield that you’ll earn on the bond to determine whether it’s better to sell or borrow.
S2000 said very good!!! OH HAPPY DAY!!! AAAA! And casually blew my mind with a simple alternative too (with that 12 year bond), gosh darn it Bill, you’re too good, and this is not even mild sarcasm, I genuinely do mean it, haha. Thank you very much as always 
Wowzer.