Skip to content

CMA Final · Risk Management in Banking and Insurance · Interest Rate Risk Management

A bank holds a bond with modified duration of 4.5. If the yield rises by 40 basis points, what is the approximate percentage change in the bond price?

The bond price falls by approximately 1.8%. Percentage price change is roughly negative modified duration times the yield change, so 4.5 multiplied by 0.40% gives 1.8%, and the direction is downward because yields rose.

  1. AIncrease of 1.8%
  2. BDecrease of 18%
  3. CDecrease of 1.8%Correct
  4. DDecrease of 0.18%

Explanation

Price change % is approximately -modified duration x change in yield = -4.5 x 0.40% = -1.8%. A rise in yield lowers price, so the increase is wrong. Using 40% instead of 0.40% gives the 18% error.

Did you get it right without looking?

One question tells you little. A timed set on Interest Rate Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise Interest Rate Risk ManagementFree diagnostic mock

More Interest Rate Risk Management questions