Skip to content

FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

A bank's investment portfolio holds a bond with a modified duration of 6.0 and a market value of USD 50 million. Convexity effects are ignored. Yields rise by 25 basis points. What is the approximate change in market value?

The value falls by about USD 0.75 million. Using modified duration, the change equals minus 6.0 times 0.0025 times USD 50 million. A yield rise lowers the price, so the sign is negative, and 25 basis points equals 0.25 percent.

  1. ADecrease of USD 0.75 millionCorrect
  2. BDecrease of USD 3.00 million
  3. CIncrease of USD 0.75 million
  4. DDecrease of USD 7.50 million

Explanation

Change = -ModDur x Δy x Value = -6.0 x 0.0025 x 50 million = -0.75 million. Using 2.5% instead of 0.25% gives 7.5 million, and 3.00 million results from using 100 bp instead of 25 bp.

Did you get it right without looking?

One question tells you little. A timed set on The Investment Function in Financial Services Management shows your real accuracy, how long you take and where you lose marks.

Practise The Investment Function in Financial Services ManagementFree diagnostic mock

More The Investment Function in Financial Services Management questions