In fixed-income portfolio management, how do duration matching and immunization strategies work?

• A. Maximizing dividend yield
• B. Eliminating credit risk entirely
• C. Minimizing interest-rate risk and preserving target metrics over time
• D. Achieving higher turnover

Answer: (C)

These strategies aim to minimize interest-rate risk and preserve target metrics over time. Duration measures how sensitive a bond’s price is to changes in interest rates—the higher the duration, the more a bond’s price moves when yields shift. By matching the duration of assets to the duration of liabilities, you reduce the net sensitivity of the portfolio to small, parallel shifts in the yield curve, helping the portfolio’s value or funded status stay steadier as rates move.

Immunization takes that idea further by designing the asset side so the combination of assets can cover future liabilities at a specific horizon, and by rebalancing to maintain that balance as time passes and rates change. It relies on duration as the primary risk-control tool and also considers convexity to smooth out the impact of larger rate moves, aiming to keep the target metrics intact even as the market moves.

Maximizing dividend yield isn’t the aim here, since these are fixed-income strategies focused on rate risk. You can’t eliminate credit risk entirely, as some risk remains in any bond portfolio. And increasing turnover would add costs and generally undermine the stability these approaches seek to provide.