# Immunization Concept Checker

Not so sure I agree with Schweser on this question from Book 3, pate 159: To immunize a portfolio consisting of a single coupon bond against a future liability, an investor should select a bond that: A. has a duration that equals the liability horizon B. has a duration that exceeds the liability horizon C. has a maturity date that extends beyond the liability horizon Schweser’s answer is as follows: A. The conditions for immunizing a portfolio against a future liability are (1) the portfolio’s duration must be equal to the duration of the liability, and (2) the present value of the assets must equal the present value of the liabilities The problem I have is that Schweser is equating liability horizon with liability duration, which to me is the same as equating bond duration with bond maturity. The question does not state that the liability is single period (though I could see such an argument being made) – it says there is just one bond, but not just one liability cash flow. I chose C for the following reason: the duration of the liability is unknown. But the duration of the bond must be less than the final maturity date, because we know that the bond is a coupon bond. Therefore, in order to meet condition number 1 of immunization (equal durations), we must chose a bond with a maturity date longer than the longest possible value for the liability duration, which is the liability horizon. Anyone else see this question differently?

I see what you are saying plyon. Again you have to make an assumption here. If the liability is a fixed and known number, then A is your answer. If the liability is variable and has a duration then you have to go with C (and you thought this out well). I wouldn’t dwell on this. You obviously know the concept inside and out. Test day questions will be better.

I think you’re reading into this one too much. When I first read the question I though, OK, I’ve got a zero and a single future liability. I’m going to assume PVs are equal so let’s match the duration. It’s not a very good question.

recycler Wrote: ------------------------------------------------------- > I think you’re reading into this one too much. > When I first read the question I though, OK, I’ve > got a zero and a single future liability. I’m > going to assume PVs are equal so let’s match the > duration. > > It’s not a very good question. No, it’s not, is it? I agree with your first thought, except of course, they explicitly tell you the bond is NOT a zero. Oh well, if I’m feeling bored and / or persnickety later (a near certainty on both counts), I may drop a line to my Schweser class email and have the instructor opine.

plyon Wrote: ------------------------------------------------------- > Oh well, if I’m feeling bored and / or persnickety > later (a near certainty on both counts) Do you like Sargento cheese?

plyon Wrote: ------------------------------------------------------- > recycler Wrote: > -------------------------------------------------- > ----- > > I think you’re reading into this one too much. > > When I first read the question I though, OK, > I’ve > > got a zero and a single future liability. I’m > > going to assume PVs are equal so let’s match > the > > duration. > > > > It’s not a very good question. > > No, it’s not, is it? I agree with your first > thought, except of course, they explicitly tell > you the bond is NOT a zero. > > Oh well, if I’m feeling bored and / or persnickety > later (a near certainty on both counts), I may > drop a line to my Schweser class email and have > the instructor opine. OK, now I’m really confused. Do they mean a portfolio with one bond that has coupon payments or a portfolio with a bond that only has one coupon payment?

If it has a coupon payment it isn’t a zero.

That’s where I think I messed up. For some reason, I read “single coupon bond” as a bond that only has one coupon at the end so it’s really a zero…argh. After rereading this one about five times, the answer only make sense if we assume the liability is one single payment in the future so in this case the liability duration would equal the liability maturity, right?

Yeah. Pretty sure this is taken from the LOS on classical immunization which I believe has a fixed and know liability in the future.

By the way, I’m now about 50 questions into a Q bank exam from Study Session 9 and these questions absolutely rot. It doesn’t help that I run fixed income for a living so there’s all this garbage in the curriculum that frankly just doesn’t fly in the real market. But these questions are much worse than anything I saw in the previous SS’s on the Qbank. And it’s 85 degrees and sunny out. And I DO like Sargento cheese.

Cool. I understand the practical implications of duration but I have never really sat down and spent time looking at the calculations for duration to really deeply understand what duration means and how the various sensitivities impact the outcomes. I can name them off but I don’t understand the mechanics as well as I would like.