The purpose of this paper is to study bond immunization strategy using bond duration and convexity and verify its usefulness. We first examine the characteristics of bond investment, bond immunization strategies, and test the relative performance of bond immunization strategy in Korean bond markets.
In general, a bond is called a fixed income security that sounds risk-free instruments to invest. Bond investment is, however, exposed to significant risks like interest rate risk, default risk, callable risk, and so on. Among these risks most important are the interest rate risks consisting of price risk and reinvestment risk. Bond immunization is a strategy that can, theoretically at least, remove interest rate risks by exploiting the trade-off relationship of price risk and reinvestment risk.
The empirical test result presents that the immunization strategy using duration and convexity is a usefull strategy in terms of immunization capability and level of risk even in our domestic bond markets.