NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Pension Funds and Financial Innovation

Zvi Bodie

NBER Working Paper No. 3101 (Also Reprint No. r1572)
Issued in September 1989
NBER Program(s):   ME

Pension funds have played a critical role in the evolution of the markets for debt and equity securities and their derivatives in the U.S. over the last 15 years. The new securities and markets can largely be explained as responses to the investment demands of pension funds in an environment of increased interest rate volatility and tighter regulation. Defined benefit pension plans offer annuities that have a guaranteed floor specified by the benefit formula. In order to minimize the cost to the sponsor of providing this guarantee, there is a strong incentive to invest an amount equal to the present value of the accumulated benefit obligation in fixed- income securities with a matching duration. The pursuit of duration matching and related immunization strategies by pension funds has contributed to the emergence and rapid growth of markets for zero coupon bonds, GIC's, CMO's, options, and financial futures contracts. Recent changes in accounting rules (FAS 87) and tax law (OBRA) are likely to reinforce the use of immunization strategies.

download in pdf format
   (782 K)

email paper

This paper is available as PDF (782 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3101

Published: Financial Management, Vol. 19, No. 3, pp. 11-22, (Autumn 1990).

Users who downloaded this paper also downloaded these:
Bodie w2917 Pensions as Retirement Income Insurance
Bodie w2752 Pension Fund Investment Policy
Bodie, Marcus, and Merton Defined Benefit versus Defined Contribution Pension Plans: What are the Real Trade-offs?
Lakonishok, Shleifer, Thaler, and Vishny w3617 Window Dressing by Pension Fund Managers
Pennacchi and Rastad w16456 Portfolio Allocation for Public Pension Funds
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us