For multiple-liability immunization, PV of Liabilities should be based on discount rate = internal rate of return of the immunized portfolio.
Is this internal rate of return of the immunized portfolio = immunized rate available / yield of bond used to immunize the portfolio?
After we add a bond to immunize the liability, does the “immunized portfolio” become “bond + liability”? Not sure if I understand why it’s called “IRR of the immunized portfolio”.
Liability portfolio = like short position in bond.
Asset portfolio = long position in bond.
Asset duration should be matched with liability duration. By multiple liability immunization all liability cash outflows should be matched when due.
>> After we add a bond to immunize the liability, does the “immunized portfolio” become “bond + liability”? Not sure if I understand why it’s called “IRR of the immunized portfolio”.
i don’t think so. The bond portfolio is still bond portfolio. For the IRR of the immunized portfolio, it is the rate where the liabilities are discounted .
So if I answer “available immunization rate of the bond used for immunization” as the discount rate used to discount liability - is that ok?
It’s IRR of immunized portfolio, thus YTM on bonds held to match liabilities duration.