To immunize a portfolio consisting of a single coupon bond against a future liability, an investor should select a bond that:

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The question asks how to immunize a portfolio consisting of a single coupon bond against a future liability. The core concept is immunization via duration matching: the sensitivity of the asset’s value to interest-rate changes (duration) should align with the timing of the liability (liability horizon).
Option B: 'has a duration that exceeds the liability horizon.' If the asset’s duration is longer than the liability horizon, the portfolio is overly sensitive to interest-rate changes for the liability’s timing, which can cause value movements to misalign with the liability and impair immunization. This increases risk rather than reducing it.
Option A: 'has a duration that equals the liability horizon.' This aligns duration with the liability horizon, which is the classic immunization technique. When duration matches, the effects of parallel shifts in the yield curve tend to offset between the asset and liability, helping to lock in the funding status at future points in time.
Option D: 'has a maturity date that extends beyond the liability horizon.' A longer maturity alone does not guarantee immunization. Maturity is not the same as duration, and a bond with a longer maturity could have a shorter or more variable duration depending on coupon, yield, and price. Therefore, matching maturity does not ensure immunization against interest-rate movements at the liability horizon.
Option C: 'has return matching an index.' Matching index return is an equity-type or benchmark-tracking objective, not specifically about immunizing against a future liability’s timing. Index matching does not address the duration-based sensitivity needed for immunization and can leave the portfolio exposed to rate movements that affect the liability.
In summary, immunization against a future liability is achieved by aligning the asset’s duration with the liability horizon, making Option A the correct choice. The other options either misstate the mechanism (duration vs. maturity), rely on an incomplete criterion (index-style return matching), or propose an excessive duration that introduces mismatch risks.

BU.232.750.81.FA25 Final Exam Fall 2025- Requires Respondus LockDown Browser

To immunize a portfolio consisting of a single coupon bond against a future liability, an investor should select a bond that:

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