Financial Calculations & Valuation Advanced

Fixed-Income Bond Portfolio Immunization & Duration Matching in Python

Construct an interest-rate-immunized bond portfolio by matching asset duration to liability horizon using linear algebra in Python NumPy.

#numpy#pandas

Problem Statement

Pension funds and insurance companies immunize their portfolios against interest rate shocks by matching asset duration exactly to liability duration.

Formula / Core Logic

Solves w1*D1 + w2*D2 = Liability_Duration subject to weight sum = 1.

Installation

pip install numpy pandas

bond-immunization-duration-matching-python.py

import numpy as np
\.def immunize_bond_portfolio(durations, target_liability_duration):
    d = np.array(durations)
    # Simple 2-bond portfolio weights solving duration match
    w1 = (target_liability_duration - d[1]) / (d[0] - d[1])
    w2 = 1.0 - w1
    return {'Bond_1_Weight': round(w1, 4), 'Bond_2_Weight': round(w2, 4)}