Immunisation of coupon paying bonds is not a passive strategy because ________.
I. the portfolio must be rebalanced every time interest rates change
II. the portfolio must be rebalanced over time even if interest rates don't change
III. convexity implies duration based immunisation strategies don't work

Question

Quizplus · Accepted Answer

Immunisation of coupon paying bonds is not a passive strategy because the portfolio must be rebalanced every time interest rates change to maintain the duration and cash flow profile, which is stated in I. Additionally, even if interest rates don't change, the portfolio must still be rebalanced over time due to bond cash flows, as mentioned in II. However, convexity does not imply that duration-based immunisation strategies don't work, so III is incorrect. Therefore, the best choice is B, I and II only.

Immunisation of Coupon Paying Bonds Is Not a Passive Strategy