Immunization of Investment in fixed Income Securities against Interest Rate Fluctuations with Duration Matching: A Generalized Formula

Abstract

Immunization is a technique to immunize an investor (such as a bondholder) against the risk that arises from the fluctuations in
interest rates (due to changes in prices), and at the same time, to get back the investor’s fund within a stipulated period. Thus, two objectives are addressed in the immunization techniques. In Finance, we have little knowledge about immunization. In a couple of special cases, immunization is very simple and straightforward. In other cases, it is a difficult technique. However, after some practices, the immunization technique has been developed and the proposed technique was first used by Meryl Lynch and then by Prudential in the US bond market in 1990. The present paper develops a step-wise formula to correctly calculate weights of different assets in which an investor should invest and how much s/he will invest in a particular asset. The mathematical formula presented in this paper automatically takes into account the duration of each asset. The mathematical formula presented in this paper automatically takes into account the duration of each asset. The mathematical formula presented in this paper
automatically takes into account the duration of each asset. To better understand the formula, a hypothetical example has been included in the paper.