What do you understand by immunization? How can it be used against protection against interest rate risk?

What do you understand by immunization? How can it be used against protection against interest rate risk? 

Ans. Immunization is a way of designing portfolio of coupon bonds so that it behaves like a zero coupon bond with a maturity equal to the investor’s investment. Bond immunization is an investment strategy used to minimize the interest rate risk of bond investments by adjusting the portfolio duration to match the investor’s investment time horizon. It does this by locking in a fixed rate of return during the amount of time an investor plans to keep the investment without cashing it in. There are two kinds of risks that are involved with coupon bonds: 

(a) Price realized if it is liquidated before maturity and 

(b) interest rate risk. The aim of immunization is to make these risks off setting each other as they move in different directions. As a result, the bond value plus accumulation of reinvested coupon payments will be same at the end of investment period, regardless of the level of interest rates. Immunization locks in a fixed rate of return during the amount of time an investor plans to keep the bond without cashing it in. Normally, interest rates affect bond prices inversely. When interest rates go up, bond prices go down. But when a bond portfolio is immunized, the investor receives a specific rate of return over a given time period regardless of what happens to interest rates during that time. In other words, the bond is “immune” to fluctuating interest rates