CMA Final · Risk Management in Banking and Insurance · Market Risk Management
A bank holds a bond portfolio worth Rs 200 crore with modified duration of 4.5. If yields rise by 50 basis points across the curve, what is the approximate change in portfolio value, ignoring convexity?
The portfolio value falls by about Rs 4.5 crore. Multiplying modified duration of 4.5 by the 0.50% yield rise gives a 2.25% price fall, which on Rs 200 crore is Rs 4.5 crore. Rising yields reduce bond prices.
- AIncrease of Rs 4.5 crore
- BDecrease of Rs 9.0 crore
- CDecrease of Rs 4.5 croreCorrect
- DDecrease of Rs 0.45 crore
Explanation
Change = -ModDur x change in yield x value = -4.5 x 0.005 x 200 = -Rs 4.5 crore. A rise in yields lowers prices, so an increase is wrong. Rs 9.0 crore results from using 1% instead of 0.5%.
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