ON THE RELATIVE IMPORTANCE OF DURATION CONSTRAINTS

This paper uncovers an implicit assumption, and its implications, made in the process of maximizing yield (or minimizing costs) subject to t he duration constraints. Using linear programming results, it is shown that this technique is sensible only if the yield of a bond is a line ar function of its duration measures. Utilizing this result the paper analyzes the relative importance of the duration constraints. Former s tudies have hinted that the first order duration may be the most impor tant. It is shown here there is no reason to satisfy the first duratio n constraint with priority over satisfaction of a higher order duratio n constraint. practitioners who use duration techniques for portfolio immunization must be aware of such an important counter-intuitive resu lt.