Portfolio immunization

Q2, Example 8, p.342, CFAI text #3. Statement: The immunization target rate of return is less than yield to maturity Solution: This statement is only true if the yield curve is upward sloping. If the yield curve is downward sloping, then this statement is not true as the immunization target rate of return would exceed the yield of marturity because of the higher reinvestment return. I don’t quite understand this. Could sb help explain further? Thanks. - sticky

If the yield curve is upward sloping then the reinvestment income will high and therefore the immunisation target rate of return can be lower than the yield to maturity.

vrajaram77 Wrote: ------------------------------------------------------- > If the yield curve is upward sloping then the > reinvestment income will high and therefore the > immunisation target rate of return can be lower > than the yield to maturity. I was about to agree with you but then found this from 2nd paragraph, section 4.1.1.3, p.339, CFAI 3: “In general, for an upward-sloping yield curve, the immunization target rate of return will be less than the yield to maturity because of the LOWER reinvestment return.” Anything wrong here? - sticky

hey sticky, this was discussed in an earlier post on this forum - i’d search for it as it was disseminated well (i thought) from those that posted there. Goign from memory the thrust of the argument is that if the curve is upward sloping the immunization target rate of return will be less because as you recieve cash flows (that must be reinvested) you will be doing so at earlier maturities because you are moving down the yeild curve. We know that earlier maturities come with ‘cheaper’ reinvestment rates becuase of the upward slope in the yield curve. This creates the immunization target rate of return less than the yield to maturity.