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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 portfolio of fixed-rate bonds with a market value of USD 200 million and a modified duration of 5.0. Ignoring convexity, by approximately how much will the portfolio's value change if yields rise by 20 basis points in a parallel shift?

The portfolio loses about USD 2.0 million. Value change is approximately negative modified duration times yield change times market value: 5.0 times 0.002 times 200 million equals 2 million, and the sign is negative because yields rose.

  1. ADecrease by USD 2.0 millionCorrect
  2. BIncrease by USD 2.0 million
  3. CDecrease by USD 0.2 million
  4. DDecrease by USD 20.0 million

Explanation

Change in value ≈ -D_mod × Δy × V = -5.0 × 0.0020 × 200 = -USD 2.0 million. The increase option has the wrong sign. The USD 0.2 million option misplaces the decimal, treating 20 bp as 0.02%.

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