Hi, This topic has, unfortunately, been discussed ad nauseum on this forum so appologies for bringing it up again. Prior to reading cfa/schweser the concept of immunization etc was quite straightforward. It’s now clear as mud and I think it’s because of the terminology that is used. Would someone please explain/define/compare the YTM of a bond portfolio, the immunization rate and the immunization target rate of return in the context of a single known liability in the future e.g pay $1m in 10yrs (duration = 10) In short, my understanding is that the ytm is the irr if the portfolio. Then, by immunizing the portfolio of assets in order to fund the liability you solve for a portfolio of bonds such that: (i) the price risk = reinvestment risk and (ii) the duration is 10. The ytm earned on this portfolio is the immunization rate and it is “locked in” - under assumptions of parallel shifts etc you are guaranteed to actually receive this return since reinvestment risk is offset by price risk. This is in contrast to “normal” ytm since it assumes all cash flows are reinvested at the ytm which is not realistic unless the yield curve is flat. The immunization target rate of return is the yield that I actually require in order to meet my liability. So, what you really want is for the immunization rate to be at least equal to the target rate. What does one do if the immunization rate on your portfolio is less than the target? I hope this is correct. Please pick holes in it and help me understand. Cheers
Immunization is the strategy that is used to match the duration of assets and liabilities . It thereby minimizes the impact of interest rates on net worth. YTM is yield to maturity of a Bond.
thanks edupristine - you may not have seen the full question above as i had to edit a few times because i was wrting it on my phone. Have you got any additional insight?
thanks!