While reading about Bond portfolio management I came across maturity matching and single period immunization. Which If I understand correctly is if the holding period of a bond is its maturity then the investor should be able to receive the purchased yield due to the fact that price return and reinvestment return offset each other. Does rebalancing still apply in this scenario? i.e will the investor have to perform some actions to ensure that they will still be able to lock in this return, and remain immunized?
1 Answer
In the simplest case, let's say I need to pay you $100 in 10 years. If I buy $100 face value of a zero coupon treasury bond maturing in 10 years, I would be able to use the payment from the bond to pay you back. The date I would receive payment from the treasury (maturity) matches the date I owe you. No matter what interest rates do between the time I purchase the bond and maturity, I would not need to do anything. I would be immune to interest rate changes.
If I bought a bond that paid coupons, I would need to invest the coupons as they were received. The future interest rates are unknown. Therefore, I would still have some risk and would not be fully immune and future trading would likely be required.