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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 50 basis points, the approximate percentage change in the bond price is closest to which of the following?

The bond price falls by about 2.25%. Using modified duration, the price change is minus 4.5 multiplied by the 0.50% rise in yield. Since yields rise, the price declines, and the estimate is approximate because convexity is ignored.

  1. AA fall of 2.25%Correct
  2. BA rise of 2.25%
  3. CA fall of 9.00%
  4. DA fall of 0.225%

Explanation

Price change ≈ -modified duration × change in yield = -4.5 × 0.50% = -2.25%. Yield rises, so price falls. A 9.00% fall comes from using 2% instead of 0.5%; a 0.225% fall mis-scales the yield change by a factor of ten.

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