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CMA Final · Strategic Financial Management · Risks in Financial Market

A bond has a modified duration of 4.5 and a market value of Rs 20 crore. If yields rise by 50 basis points, what is the approximate change in the bond value using duration alone?

The bond value falls by about Rs 0.45 crore. Modified duration of 4.5 times a 0.50% yield rise gives a 2.25% price decline, and 2.25% of Rs 20 crore is Rs 0.45 crore.

  1. AIncrease of Rs 0.45 crore
  2. BDecrease of Rs 4.5 crore
  3. CDecrease of Rs 0.45 croreCorrect
  4. DDecrease of Rs 2.25 crore

Explanation

Percentage change = -4.5 x 0.50% = -2.25%. Applied to Rs 20 crore, the change = -Rs 0.45 crore. An increase ignores the inverse relation of price and yield. Rs 2.25 crore forgets to apply the percentage to the value.

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