CMA Final · Risk Management in Banking and Insurance · Market Risk Management
A bank holds a bond portfolio with a market value of Rs 200 crore and a modified duration of 4.5. If yields rise by 50 basis points across the curve, what is the approximate change in portfolio value using duration?
The portfolio loses approximately Rs 4.50 crore. Price change is modified duration times yield change times value: 4.5 x 0.5% x Rs 200 crore equals Rs 4.5 crore, and the sign is negative because rising yields reduce bond prices.
- AGain of Rs 4.50 crore
- BLoss of Rs 4.50 croreCorrect
- CLoss of Rs 9.00 crore
- DLoss of Rs 45.00 crore
Explanation
Change = -ModDuration x change in yield x value = -4.5 x 0.005 x 200 = -Rs 4.5 crore. A gain has the wrong sign because bond prices fall when yields rise. Rs 9 crore uses 1% rather than 0.5%, and Rs 45 crore misplaces the decimal.
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