Parallel Shift in Yield Curve Effect on Immunization

CFA Level III Fixed Income
#1

Hi,

It says in the CFAI that a parallel shift in the yield curve will result in the portfolio value increasing (Exhibit 11 Reading 20). I don’t understand how this can happen as an increase in interest rates will surely lead to a lower portfolio value?

Thanks,

#2

You didn’t mention what direction the shift happens.

#3

It says for either a negative or a positive shift the portfolio value will increase

#4

I think the reading fails to mention this but it has to do with convexity. If you have an immunized portfolio, you want the assets to have greater convexity than the liabilities.

That means that if there’s a large change in rates (either upward or downward) your assets will be worth more than your liabilities.