Variations on Bond Immunization

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Variations on Bond Immunization

The most common way to immunize a bond portfolio is called combination matching. In combination matching, the portfolio is designed not only to match its duration to its time horizon, but also its cash flow and goals. For the first several years of the portfolio, the cash flow from any maturing principal (plus coupon and reinvestment income) aims to equal the intermediate investment goals set for the portfolio. Cash flow is paid out to fund intermediate goal payments, giving the portfolio very little cash to reinvest and thus little reinvestment risk. The low reinvestment risk helps the portfolio to lock in a rate of return regardless of interest rate changes.