On August 1 a portfolio manager has a bond portfolio worth $10 million. The duration of the portfolio in October will be 7.1 years. The December Treasury bond futures price is currently 91-12 and the cheapest-to- deliver bond will have a duration of 8.8 years at maturity. Each contract is for the delivery of $100,000 face value of bonds How should the portfolio manager immunize the portfolio against changes in interest rates over the next two months?

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Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.