Classical Immunization?

CFA Level III
#1

According to classical immunization, if you set the effective duration of the bond equal to the duration of the liability, you’ll be immunized from interest rate risk. It also says as part of the process to set the PV of the bond equal to the PV of the liability.

My question: if your liability to be paid in 2 years is $1,000 with a PV today of $750, does that mean you buy a bond today with a PV of $750? How exactly do you do that since the PV of a bond is its face value. Does this mean you would have to buy a $1,000 face value bond due in two years that is priced at a discount of $750? Is the PV supposed to be the bonds face value?

Thanks for the help!

#2

PV of bond NOT EQUALS face value. PV = face value when the yield = coupon rate.

It does not matter whether you purchase bond at premium, par or discount as long as the total amount invested = PV of liability and it is duration matched to achieve classical immunization.