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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Fixed Income Securities (NISM XXI-A)

A bond has a modified duration of 4.5. If its yield rises by 40 basis points, the approximate percentage change in its price is:

The price falls by about 1.80%. Price change is approximately minus modified duration times the yield change, so 4.5 multiplied by 0.40% gives 1.80%, with the sign negative because yields have risen.

  1. A+1.80%
  2. B-1.80%Correct
  3. C-4.50%
  4. D-0.18%

Explanation

Approximate price change = -modified duration x change in yield = -4.5 x 0.40% = -1.80%. A positive sign would ignore the inverse relation. Using 4.5% ignores the size of the yield change, and 0.18% mistakes 40 bps for 0.04%.

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