Calculating Immunization
Immunization starts with the assumption that the yield curve is flat. It then assumes that interest rate changes are parallel shifts up or down in that yield curve. Let the net cash flow at time t be denoted by Rt, i.e.:
Rt = At - Lt ; t = 1,2,3,...,n
where At and Lt represent cash inflows (At) and outflows or liabilities (Lt)
We will assume that the present value of cash inflows from the assets is equal to the present value of the cash outlfows from the liabilities. Thus, we have:
P(i) = 0
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