FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management
A bank holds a 10-year bond with modified duration of 7.5 and a market value of USD 40 million. Market yields are expected to rise by 40 basis points. Ignoring convexity, what is the approximate change in the bond's market value?
The bond's value falls by about USD 1.20 million. Multiplying modified duration of 7.5 by the 0.40% yield rise gives a 3.0% price decline, and 3.0% of USD 40 million is USD 1.2 million. Rising yields reduce prices, so the sign is negative.
- ADecrease of USD 1.20 millionCorrect
- BDecrease of USD 0.12 million
- CIncrease of USD 1.20 million
- DDecrease of USD 3.00 million
Explanation
Change = -ModDur x Δy x Value = -7.5 x 0.004 x 40 million = -1.2 million. Option B misplaces the decimal. Option C has the wrong sign. Option D uses 100 bp (7.5 x 0.01 x 40 = 3.0).
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