Question

Which of the following statements regarding immunization are true?

Answer 1

Answer:

B. II only

Step-by-step explanation:

Immunisation is used to lower the risk factor that may arise due to change in interest rate . For it, cash inflow and cash outflow are matched in terms of their timing . In other words, effective duration of asset and liability are matched with the help of methods like cash flow matching , duration matching etc.

Even lowering of interest  rate in long term may entail risk because it may increase the bond price which may affect the business adversely in some way if bond is kept as liability . It may reduce the price of asset if it is held as asset .

Exact matching is possible only when matching of cash flow is achieved along with its timing . Matching of present value will not serve the purpose .

Macaulay or modified duration can be used to develop an immunization strategy . Both of them calculate the duration of asset and liability with some change in the method of calculation.