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CMA Final · Strategic Financial Management · Interest Rate Derivatives

A bond has a modified duration of 4.5 and is priced at ₹1,00,000 per unit holding of ₹50 lakh market value. Yields are expected to rise by 40 basis points. Using duration alone, the approximate change in value of the ₹50 lakh holding is:

The holding falls by about ₹90,000. Modified duration of 4.5 times a 0.40% yield rise gives a 1.8% price decline, and 1.8% of ₹50 lakh is ₹90,000. The price moves inversely to yield.

  1. ADecrease of ₹90,000Correct
  2. BIncrease of ₹90,000
  3. CDecrease of ₹9,00,000
  4. DDecrease of ₹1,12,500

Explanation

Percentage change = -4.5 x 0.40% = -1.8%. Applied to ₹50,00,000 = -₹90,000. Option 3 uses 4% instead of 0.40%. Option 2 has the wrong sign.

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