Hostname: page-component-78c5997874-v9fdk Total loading time: 0 Render date: 2024-11-15T15:20:25.945Z Has data issue: false hasContentIssue false
  • English
  • Français

Floating Rate Notes and Immunization

Published online by Cambridge University Press:  06 April 2009

Don M. Chance
Get access Rights & Permissions [Opens in a new window]

Extract

Recent developments in the literature on bond portfolio management have identified conditions under which uncertainty of the investment return attributable to interest rate changes is eliminated. Such a strategy, called immunization, is achieved when the duration of the bond or portfolio of bonds is equal to the investor's holding period. Duration is defined as a weighted average time to maturity and was originally developed by Macaulay [13]. The condition under which immunization is obtained by setting duration equal to holding period was derived by Redington [14] and Fisher and Weil [10] and further developed by Bierwag and Kaufman [4], Bierwag [2], and Khang [12]. Bierwag [3] has provided a concise summary of the theory of immunization, and Bierwag and Khang [7] show that immunization is equivalent to selecting a strategy in which the worst possible return is maximized, i.e., a minimax strategy. Bierwag [1] examines immunization under multiple shocks to the term structure and Bierwag, Kaufman, and Toevs [6] extend the concept to a general equilibrium, two-state Arrow-Debreu world.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 18 , Issue 3 , September 1983 , pp. 365 - 380
Copyright
Copyright © School of Business Administration, University of Washington 1983

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Bierwag, G. O. “Dynamic Portfolio Immunization Policies.” Journal of Banking and Finance, Vol. 3 (04 1979), pp. 23–42.CrossRefGoogle Scholar
[2]Bierwag, G. O. “Immunization, Duration, and the Term Structure of Interest Rates.” Journal of Financial and Quantitative Analysis, Vol. 12 (12 1977), pp. 725–742.CrossRefGoogle Scholar
[3]Bierwag, G. O. “Measures of Duration.” Economic Inquiry, Vol. 16 (10 1978), pp. 497–507.CrossRefGoogle Scholar
[4]Bierwag, G. O., and Kaufman, George G.. “Coping with the Risk of Interest Rate Fluctuations: A Note.” Journal of Business, Vol. 50 (07 1977), pp. 364–370.CrossRefGoogle Scholar
[5]Bierwag, G. O., Kaufman, G. G.; and Toevs, A.. “Recent Developments in Bond Portfolio Immunization Strategies.” Proceedings of a Conference on ‘Duration: State of the Art.’“ (07, 1981).Google Scholar
[6]Bierwag, G. O., Kaufman, G. G.; and Toevs, A.. “Single Factor Duration Models in a Discrete General Equilibrium Framework.” Journal of Finance, Vol. 37 (05 1982), pp. 325–338.Google Scholar
[7]Bierwag, G. O., and Khang, Chulsoon. “An Immunization Strategy is a Minimax Strategy,” Journal of Finance, Vol. 34 (05 1977), pp. 389–399.CrossRefGoogle Scholar
[8]Cox, J. C.; Ingersoll, J. E. Jr; and Ross, S. A.. “An Analysis of Variable Rate Loan Contracts.” Journal of Finance, Vol. 35 (05 1980), pp. 389–403.CrossRefGoogle Scholar
[9]Fama, E. F. “Forward Rates as Predictors of Future Spot Rates.” Journal of Financial Economics, Vol. 3 (10 1976), pp. 361–377.Google Scholar
[10]Fisher, L., and Weil, R. L.. “Coping with the Risk of Interest Rate Fluctuations: Returns to Bondholders from Naive and Optimal Strategies.” Journal of Business, Vol. 44 (10 1971), pp. 408–431.CrossRefGoogle Scholar
[11]Ingersoll, J. E. Jr; Skelton, J.; and Weil, R. L.. “Duration Forty Years Later.” Journal of Financial and Quantitative Analysis, Vol. 13 (11 1978), pp. 627–650.CrossRefGoogle Scholar
[12]Khang, Chulsoon. “Bond Immunization When Short-Term Interest Rates Fluctuate More than Long-Term Rates.” Journal of Financial and Quantitative Analysis, Vol. 14 (12 1979), pp. 1085–1090.Google Scholar
[13]Macaulay, F. R.Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields, and Stock Prices in the United States Since 1856. New York: National Bureau of Economic Research (1938).Google Scholar
[14]Redington, F. M. “Review of the Principle of Life Office Valuations.” Journal of the Institute of Actuaries, Vol. 78 (1952), pp. 286–340.CrossRefGoogle Scholar