DURATION AND ITS APPLICATION TO A BOND PORTFOLIO IMMUNIZATION

At present economical subjects deal with the problem of the selection of suitable financial investments to make a profit. The decision depends on the amount of money, that are to be invested, on the investment horizont and on the risk profile of the decision maker. Bonds represent one of the investment possibilities. A bond is defined as a debt security with the obligation of an issuer to pay a holder out the given sum on maturity, resp. regular interest yields on the stipulated dates. Apart from supply and demand for bonds in the capital market and other factors the price of a bond responds to values of interest rates. It is possible to speculate in a bond price development on the base of interest rate estimations. It can help an investor for his/her decision making. The aim of the contribution is to introduce a mathematical instrument - duration, that determines the bond price sensitivity on any change of the interest rate. Using of the duration in the construction of a bond portfolio immunized against the undesirable interest rate development will be demonstrated on the numerical examples.