Immunization

AAA

DEFINITION of 'Immunization'

A strategy that matches the durations of assets and liabilities thereby minimizing the impact of interest rates on the net worth.

Also known as "multiperiod immunization".

INVESTOPEDIA EXPLAINS 'Immunization'

For example, large banks must protect their current net worth, whereas pension funds have the obligation of payments after a number of years. These institutions are both concerned about protecting the future value of their portfolios and therefore have the problem of dealing with uncertain future interest rates. By using an immunization technique, large institutions can protect (immunize) their firm from exposure to interest rate fluctuations. A perfect immunization strategy establishes a virtually zero-risk profile in which interest rate movements have no impact on the value of a firm.

RELATED TERMS
  1. Dedicated Portfolio

    A passive form of portfolio management that involves the matching ...
  2. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) ...
  4. Reinvestment Risk

    The risk that future coupons from a bond will not be reinvested ...
  5. Risk

    The chance that an investment's actual return will be different ...
  6. Risk Financing

    The determination of how an organization will pay for loss events ...
Related Articles
  1. Investing

    The Advantages Of Bonds

    Bonds contribute an element of stability to almost any portfolio and offer a safe and conservative investment.
  2. Options & Futures

    Top 4 Strategies For Managing A Bond Portfolio

    Find out how these strategies work and how you can put them to work for you.
  3. Options & Futures

    Immunization Inoculates Against Interest Rate Risk

    Big-money investors can hedge against bond portfolio losses caused by rate fluctuations.
  4. Options & Futures

    Was Buffet Right about Derivatives as WMDs?

    Why Warren Buffet described derivatives as weapons of mass destruction, and when can they be helpful or harmful?
  5. Economics

    What’s Driving U.S. Stocks? Irony.

    A seesaw week for U.S. stocks ended on the upside last week, though the rally was more a function of slow growth rather than a booming economy.
  6. Mutual Funds & ETFs

    How To Choose The Right ETF?

    Choosing the right ETF really isn’t that complicated. If you stay focused on a few key areas, you may find the experience to be much easier.
  7. Economics

    What is Value Added?

    Value added is used to describe instances where a firm takes a product and adds a feature that gives customers a greater sense of value.
  8. Economics

    What is a Wholly Owned Subsidiary?

    A company whose common stock is 100% owned by another company, called the parent company.
  9. Economics

    What is the Breakeven Point?

    In general, when gains or revenue earned equals the money spent to earn the gains or revenue, you’ve hit the breakeven point.
  10. Taxes

    Will Itemized Deductions Get You A Bigger Refund?

    April and taxes are due soon. If you need to file your return, you might have to decide if itemizing your deductions this year will net you a better deal.

You May Also Like

Hot Definitions
  1. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  2. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  3. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  4. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  5. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  6. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
Trading Center