CMA Final · Strategic Financial Management · Risks in Financial Market
A bond portfolio manager at a Mumbai mutual fund holds a bond with a modified duration of 4.5 and a market value of Rs 2,00,00,000. If yield rises by 50 basis points, the approximate change in the bond's market value (ignoring convexity) is:
The value falls by Rs 4,50,000. Price change is approximately minus modified duration times yield change: 4.5 x 0.5% = 2.25%, and 2.25% of Rs 2,00,00,000 is Rs 4,50,000. Yields rising causes bond prices to decline.
- AIncrease of Rs 4,50,000
- BDecrease of Rs 4,50,000Correct
- CDecrease of Rs 9,00,000
- DDecrease of Rs 45,00,000
Explanation
Percentage change = -ModDur x change in yield = -4.5 x 0.5% = -2.25%. Value change = 2.25% x Rs 2,00,00,000 = Rs 4,50,000 fall. Rs 9,00,000 results from using 1% instead of 0.5%, and the increase option has the wrong sign.
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