What is the primary purpose of duration matching in fixed income immunization?

• A. It balances price risk and reinvestment risk and aligns duration with investment horizon.
• B. To maximize yield without regard to risk.
• C. To minimize default risk.
• D. To select securities with the same coupon.

Answer: (A)

Duration matching in fixed income immunization is about protecting a portfolio from interest-rate moves by making the sensitivity of assets to rates align with when you need the cash. By setting the portfolio’s duration to the investment horizon, a rise or fall in rates changes bond prices and reinvestment income in offsetting ways. The net effect helps keep the portfolio value and the ability to meet future obligations more stable. This focuses on balancing price risk with reinvestment risk, which is the heart of immunization. It isn’t about chasing higher yield, reducing default risk, or picking securities with the same coupon, since those factors don’t ensure that rate-driven price and reinvestment effects offset each other.