Why does immunization against interest rate shocks using duration for fixed-income securities work?
A)Because interest rate changes are relatively predictable.
B)Because the gains or losses on reinvested cash flows that result from an interest rate change are exactly offset by losses or gains from the security when it is sold.
C)Because the fixed-income security gravitates toward its maturity value as it approaches its maximum duration.
D)Because cash flows that result from the security are not reinvested so they are not affected by interest rate changes in the same way as the security's gain or loss when it is sold.
E)It doesn't work because perfect immunization is impossible to accomplish.

Question

Quizplus · Accepted Answer

Immunization against interest rate shocks using duration works because it aims to balance the price risk and reinvestment risk associated with fixed-income securities. When interest rates change, the gains or losses on reinvested cash flows are offset by the opposite effect on the market value of the security, thus aiming to protect the investor from interest rate movements.

Why Does Immunization Against Interest Rate Shocks Using Duration for Fixed-Income