Floating Rate Notes and Immunization

Recent developments in the literature on bond portfolio management have identified conditions under which uncertainty of the investment return attributable to interest rate changes is eliminated. Such a strategy, called immunization, is achieved when the duration of the bond or portfolio of bonds is equal to the investor's holding period. Duration is defined as a weighted average time to maturity and was originally developed by Macaulay [13]. The condition under which immunization is obtained by setting duration equal to holding period was derived by Redington [14] and Fisher and Weil [10] and further developed by Bierwag and Kaufman [4], Bierwag [2], and Khang [12]. Bierwag [3] has provided a concise summary of the theory of immunization, and Bierwag and Khang [7] show that immunization is equivalent to selecting a strategy in which the worst possible return is maximized, i.e., a minimax strategy. Bierwag [1] examines immunization under multiple shocks to the term structure and Bierwag, Kaufman, and Toevs [6] extend the concept to a general equilibrium, two-state Arrow-Debreu world.