CMA Final · Strategic Financial Management · Risks in Financial Market
A bond portfolio manager holds a bond with a modified duration of 4.5 years. Market yields are expected to rise by 40 basis points (parallel shift). Using duration alone, the approximate percentage change in the bond's price is:
The price falls by about 1.80%. Using modified duration, the percentage price change equals negative duration times the yield change, so 4.5 multiplied by 0.40% gives 1.80%, with a decline because yields are rising and bond prices move inversely to yields.
- AA fall of 1.80%Correct
- BA rise of 1.80%
- CA fall of 0.18%
- DA fall of 11.25%
Explanation
Price change ≈ -Modified duration × change in yield = -4.5 × 0.40% = -1.80%. The sign is negative because yields rise. Option C wrongly converts 40 bp to 0.04%; option B ignores the inverse price-yield relationship.
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