12 Dec

Immunization of Bonds | CA Final SFM

Investment in bonds cannot be considered completely risk free. Such investment can have the following two types of risk:

  1. Interest Rate Risk
  2. Reinvestment Risk

1. Interest Rate Risk

  • Such risk arises when interest rate prevailing in market increases.
  • This will cause an increase in the expectation for the bond holder.
  • As a result, the discounting rate i.e. DYR increases and the present value of bond decreases.

2. Reinvestment Risk

  • Such risk arises when interest rate prevailing in market decreases.
  • As a result, the bond that is currently held will have increase in its value.
  • However, once the bond is redeemed, the investor gets the redemption price in hand.
  • The investment of such amount cannot be made at the earlier coupon rate and the reinvestment will be at a lower rate resulting into reduced income for the investor.

Immunization of bond is a process of creating a bond portfolio through which the interest rate risk and reinvestment risk can be either eliminated or minimized.


Immunization cannot be achieved through single bond and creating a bond portfolio is necessary for immunization.






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