ABSTRACT
This chapter presents definitions that, achieve immunization, developed for different assumptions about the stochastic changes in interest rates. The optimal selection of an immunized bond portfolio is shown to be related to the term structure of interest rates. An observed term structure of yields under the traditional expectations hypothesis contains information about the course of future interest rates. Future uncertainty is represented by random shifts in the observed term structure. Different measures of duration that produce immunization are shown to correspond to different stochastic properties of the uncertainty introduced. The chapter focuses on random shifts of the term structure, immunization may be achieved by the purchase of a single coupon bond. More complex random shifts of the term structure may require diversification among many bonds of differing maturities and coupon rates. Investment models are developed in the context of discrete time periods as well as in the context of continuous time.
