CFA Level 3 Practice Exam 2025 – Complete Exam Prep

A key feature of contingent immunization is the combination of classical immunization and active management. Contingent immunization is a strategy that aims to protect a bond portfolio against interest rate fluctuations while allowing for active management to seek additional returns.

In classical immunization, the focus is on matching the duration of assets and liabilities to ensure that the portfolio can meet its obligations, regardless of interest rate movements. However, contingent immunization introduces flexibility by allowing the investment manager to take an active approach in managing the portfolio with potential for higher returns, as long as the assets remain above a certain threshold to maintain the immunization. This strategy is particularly useful in environments where interest rates are volatile, providing a safety net while still taking advantage of market opportunities.

The ability to engage in active management with the safety net provided by immunization is what distinguishes contingent immunization from other strategies. It emphasizes both the protection and the potential for growth, making it a strategic choice for managing portfolios that have specific liability concerns.