CFA Examination Level III The ability to immunize a bond portfolio is very desirable for bond portfolio managers in some instances. a. Discuss the components of interest rate risk. Assuming a change...

CFA Examination Level III

The ability to immunize a bond portfolio is very desirable for bond portfolio managers in some instances.

a. Discuss the components of interest rate risk. Assuming a change in interest rates over time, explain the two risks faced by the holder of a bond.

b. Define immunization and discuss why a bond manager would immunize a portfolio.

c. Explain why a duration-matching strategy is a superior technique to a maturity-matching strategy for the minimization of interest rate risk.

d. Explain in specific terms how you would use a zero coupon bond to immunize a bond portfolio. Discuss why a zero coupon bond is an ideal instrument in this regard.

e. Explain how contingent immunization, another bond portfolio management technique, differs from classical immunization. Discuss why a bond portfolio manager would engage in contingent immunization.