Dynamic Immunization and Transaction Costs With Different Term Structure Models

A bond portfolio selection model is developed in a dynamic framework using different term structures, but without transactions costs. We show that the optimal portfolios are consistent with Khang\u27s dynamic immunization theorem, i.e., the optimal path consists of making portfolio duration equal to the investor\u27s horizon planning period. The model is then extended to include transaction costs. The resulting optimal portfolios are no longer consistent with Khang\u27s dynamic immunization theorem. In fact, the strategy for constructing the optimal portfolio consists of initially choosing a portfolio with a duration that is smaller than the horizon planning period