Duration

This paper illustrates the financial problems which can arise in an environment of changed interest rates if the maturities of a company's assets and liabilities are significantly different, and describes how the company can reduce he impact of such mismatch risk by immunizing its asset portfolio. It also defines internal rate of return, cash flow matching, duration, zero-coupon bonds, and other terms and concepts that are related to managing a portfolio so as to control mismatch risk. The body of the paper provides only a general overview of the risks of being mismatched and of the basic types of portfolio immunization techniques that can be used to achieve better matching. Five appendices deal with certain topics in slightly more detail. Key words: duration, interest rates, portfolio immunization, asset-liability management, internal rate of return bonds, mismatch.