The methodology for immunizing a portfolio against parallel shifts in the term structure of interest rates is well known. This method relies on the concept of duration, where duration is defined as the weighted average of the maturities of the interest and principal cash flows of the portfolio. When the investment time horizon of the portfolio is equal to the duration of the portfolio, the portfolio is immunized against parallel movements in the term structure of interest rates. This approach has been frequently criticized, however, on the grounds that movements in the term structure of interest rates are generally not parallel. It is an empirical fact that the short end of the term structure tends to be more volatile than the long end. Unfortunately, in the case of a general shift in the term structure, there is at present no complete analytical solution to the immunization problem. Professor de la Grandville and Professor Pakes are extending existing work in this area to find a generalized analytical solution to the immunization problem. The purpose of finding a general analytical solution to the immunization problem is to protect bond portfolios against random shocks to the term structure of interest rates.
