Classical Immunization - True or False


So the definition of classical immunization is the process of structuring a bond portfolio that balances any change in the value of the portfolio with the return from the reinvestment of the coupon and principal payments received throughout the investment period, and irrespective of any parallel shifts in the yield curve.

What does it mean by irrespective? If it is irrespective is a buy and hold strategy and it does not need to be rebalanced.

So is it reall irrespective of any parallel shifts in the yield curve? I guess no because if the yield curve changes and I, as a bond manager who need to met some liability, I would also need to change my duration.

Any thoughts?

It protects the portfolio from a single instantaneous parallel shift in the yield curve.

So in practical investment life does it have any usefulness?

Yes, I think so, because with immunization, you can meet future liabilities without compromising such large sum of funds (as one would with cashflow matching, for instance).

Nechets, but in real life the non single instantaneous parallel shifts… So classical single immunization would be pointless.

you cannot plan for what you cannot expect to see.

At the least if you know you can cover for the single instantaneous parallel shift - you will have more available on hand - so that if something worse occurs - you have some fallback options…

So Classical Immunization is the “least” amount you can expect (or rather NEED) your portfolio to have … I believe there is a U shaped graph in the book - with a straight line underneath (tangential to the U) talking about this same concept.