Immunization rate

CFA Level III Fixed Income
#1

Sch book 3, LOS 20 I, Pg34

I have been working on the ‘Immunization rate’ problems, but somehow I lack complete clarity.

I wish someone generous could please help me fill the understanding gap for the below questions.

Immunization rate, what is it?

How is it different from a yield or coupon of a bond?

Why does it change for a year to year for the same liability/strategy?

How do we identify the revised immunization rate?

Anyone wishing to add more, please feel free.

Thanks much in advance.

#2

It’s essentially the market rate. A pension will state a required return (e.g., 6%), but you believe that you can go out and get 8%. The 8% represents your immunization rate and the difference between the immunization rate and required return represents the cushion spread. In this case, it would be 2%. The immunization rate may become your yield if you choose to buy bonds at that rate. If you do, the market rate or immunization rate will change and impact your safety margin.