Advanced Diploma of Financial Planning (ADFP) Practice Test 2025 - Free Financial Planning Questions and Study Guide.

When managing bond portfolios, immunization strategies are critical for minimizing interest rate risk and ensuring that portfolio durations align effectively with future cash flow needs. The traditional strategies include the ladder, barbell, and bullet approaches, each serving distinct purposes in managing the timing and magnitude of cash flows.

The ladder strategy involves purchasing bonds with varying maturities, which allows for regular cash flow and the ability to reinvest at different interest rates as bonds mature. This approach helps to spread interest rate risk over multiple periods.

The barbell strategy consists of investing in a combination of short-term and long-term bonds while avoiding intermediate maturities. This provides exposure to different points on the yield curve, allowing for potential higher yields from long-term bonds while maintaining liquidity with the short-term investments.

The bullet strategy focuses on bonds that all mature at a certain point in time, which creates a concentrated cash flow at maturity. This is effective for addressing specific future liabilities that are anticipated at a known date.

In contrast, the random strategy lacks a structured approach to bond selection and maturity distribution, offering no specific method for managing interest rate risk or aligning with cash flow needs. This strategy does not provide the same benefits as the traditional strategies mentioned, making it less effective for immunization purposes in a bond