IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Duration, convexity and immunisation
A bond portfolio has a volatility of 6.50 and a current value of Rs 40,00,000 at a yield of 7% effective. Using the first-order volatility approximation, what is the approximate value if the yield rises by 0.20 percentage points (to 7.2%)?
The approximate value is Rs 39,48,000. Value falls by volatility times the value times the yield change: 6.5 x 40,00,000 x 0.002 equals Rs 52,000. Subtracting this from Rs 40,00,000 gives Rs 39,48,000, since a yield rise lowers value.
- ARs 40,52,000
- BRs 39,48,000Correct
- CRs 39,74,000
- DRs 39,18,000
- Rs 39,07,000
Explanation
Change in value ≈ -V x volatility x di = -4,000,000 x 6.5 x 0.002 = -52,000. New value = 3,948,000. The option 40,52,000 has the wrong sign.
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