A bond portfolio is immunized from interest rate risk if the modified duration of the portfolio is always equal to the desired investment horizon.

Question

Quizplus · Accepted Answer

Immunization is a strategy used by bond investors to protect against interest rate risk. It involves adjusting the duration of a bond portfolio in such a way that the portfolio's sensitivity to interest rate changes is minimized. One way to achieve immunization is to ensure that the portfolio's modified duration is equal to the investment horizon. Modified duration measures the sensitivity of a bond's price to changes in interest rates, and the investment horizon is the length of time over which the investor plans to hold the portfolio. By keeping the modified duration equal to the investment horizon, the portfolio's value should remain relatively stable even if interest rates fluctuate. Therefore, the statement is true.

A Bond Portfolio Is Immunized from Interest Rate Risk If