Minimum Immunisation

[johntavv]

The text says:
A minimum immunisation risk approach should be as good as cash flow matching and likely will be better, since immunisation requires less money to fund liabilities.
CFAI reading 21, practice problem 13 says:
Whereas cash flow matching generally has less risk of not satisfying future liabilities, multiple liability immunisation generally costs less.
So both sections agree that immunisation costs less. However, the text says that immunisation is better than cash flow, while the practice problem says that cash flow matching is better (has less risk of not satisfying liabilities).
Why are these different?

 

[S2000magician]

One’s better because it matches the cash flows better, the other’s better because it costs less.
What’s your yardstick of goodness?

 

[johntavv]

So i’ve just misinterpreted this then.
Cash flow matching is better from the perspective of it matching cash flows. But immunisation is better from a cost perspective.
Thanks s2000.

 

[S2000magician]

My pleasure.

 

[cofeyniy]

Further to this topic.
It is said that immunization target rate of return is less than YtM in case of normal yield curve (ie long term rates are higher than short term rates). Later in the reading there is an example of a barbell portfolio and the situation in which short term rates decline while long term rates increased (non parallel shift with yield curve becoming even more upward sloping). It is explained, that in this case the portfolio experiences low reinvestments rates.
I don’t undestand why. If long term rates went up, that it will be possible to reinvest cashflows at a higher rate. No?