Just started Fixed Income, so please bear with me
Say I’ve got a liability with a horizon of 4 years. I understand to immunize this, one of the goals is to match the Mac Duration. Hence our assets should have a Mac Duration of 4 years too. To do this, I understand we could buy 2 bonds with a Mod Duration of 3.5 years and 4.5 years (bullet portfolio).
My questions are:
1.) Why are we matching Mac Duration and not Modified/Effective Duration ?
2.) What is logic behind averaging the duration of assets (3.5 and 4.5) to bring it to 4 years?