__________ involves purchasing a portfolio of bonds that produce cash flows matching closely those cash flows of the underlying liability.

A) Cash matching
B) Immunisation
C) Hedging
D) none of these choices

Question

__________ involves purchasing a portfolio of bonds that produce cash flows matching closely those cash flows of the underlying liability.

A) Cash matching
B) Immunisation
C) Hedging
D) none of these choices

Quizplus · Accepted Answer

Cash matching provides one approach to ensuring that sufficient cash flows exist to meet liabilities as they fall due.The initial portfolio is set up,and no further adjustment should be required to the portfolio.The cash flows generated from coupon and principal payments exactly meet the known liabilities.This task becomes less precise when the liability and the asset portfolio cash flows are uncertain.The liability may be a function of interest rates or the level of economic activity,and the assets may include default risk or call provisions.As uncertainty increases,the task focuses on minimising cash matching errors rather than exact matching.This is particularly the case where cash matching is based upon dividend flows from a share portfolio.

__________ Involves Purchasing a Portfolio of Bonds That Produce Cash