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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities

A bond has a modified duration of 4.5. A client holds Rs 20,00,000 of this bond at market value. If the yield rises by 50 basis points, what is the approximate change in the value of the holding, using the duration approximation?

The holding falls by about Rs 45,000. Modified duration of 4.5 times a 0.50% yield rise gives an estimated price drop of 2.25%, and 2.25% of Rs 20,00,000 is Rs 45,000. The price moves opposite to the direction of yields.

  1. ADecrease of about Rs 45,000Correct
  2. BDecrease of about Rs 4,50,000
  3. CIncrease of about Rs 45,000
  4. DDecrease of about Rs 22,500

Explanation

Percentage price change is about -4.5 x 0.50% = -2.25%. Applied to Rs 20,00,000 this gives -Rs 45,000. Rs 4,50,000 results from using 5 percentage points instead of 0.5. Rs 22,500 results from halving the result again.

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