Duration Of Its Immune-mix Strategy Applied Research

The duration represents an important and powerful tool in minimizing the risk of changing interest rates. A brief introduction of fixed income bond portfolio theory leads to the concept of duration. The property of duration is also examined. Convexity is used for adjustment of duration measuring effect when interest rate changes a lot. After detailed look into modes of duration and convexity, this paper introduces the general investment portfolio theories and illustrating examples about single bond, bond portfolios consisting of two bonds, bond investment strategies in funds management. The duration gap (DGAP) management is a vital technique in adjusting the structure of balance sheet to be immunized of interest rate risk. The author observes that the DGAP theory of single factor duration gap equations by Bierwag and Kaufman, etc. will produce relatively large mistakes if large change of interest rate occurs. Convexity is therefor considered to adjust the effect of DGAP by the author and this come into the first highlight in this paper. Results from the simple weighted average duration are observed to be different to that from the actual cash flows analysis. Based on this second highlight findings, a new relation between the asset and liability duration is deduced to measure the value changes to interest rate change. This hence becomes the third highlight of this paper.