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FRM Part II · FRM Exam Part II · Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

A bank holds a bond portfolio with a modified duration of 6.0 and a yield that rises by 50 basis points in a parallel shift. Ignoring convexity, what is the approximate percentage change in the portfolio's price?

The price falls by about 3.0%. Approximate price change equals negative modified duration times the yield change, so -6.0 multiplied by 0.50% gives -3.0%. Higher yields reduce bond prices, so the sign is negative.

  1. A-3.0%Correct
  2. B+3.0%
  3. C-0.3%
  4. D-12.0%

Explanation

Percentage price change ≈ -modified duration × change in yield = -6.0 × 0.005 = -3.0%. The +3.0% option has the wrong sign, since rising yields lower prices. The -0.3% option mis-scales the yield change by treating 50 bp as 0.05%.

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