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CMA Final · Strategic Financial Management · Risks in Financial Market

A bond portfolio manager holds a bond with a modified duration of 4.5 and a market value of Rs 2,00,00,000. Yields are expected to rise by 40 basis points in parallel. Using the duration approximation only, what is the expected change in the bond's value?

The bond value falls by Rs 3,60,000. Modified duration of 4.5 times a 0.40% yield rise gives a 1.8% price decline, and 1.8% of Rs 2,00,00,000 is Rs 3,60,000. Bond prices move inversely to yields, so the change is a loss.

  1. AFall of Rs 3,60,000Correct
  2. BRise of Rs 3,60,000
  3. CFall of Rs 36,00,000
  4. DFall of Rs 4,50,000

Explanation

Change in price % = -ModD x change in yield = -4.5 x 0.40% = -1.8%. Value change = 1.8% x 2,00,00,000 = Rs 3,60,000 fall. Option rising ignores the inverse yield-price relation; Rs 36,00,000 comes from treating 40 bps as 4%.

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