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CMA Final · Strategic Financial Management · Risks in Financial Market

A bond priced at ₹1,000 has a Macaulay duration of 4.2 years and a yield to maturity of 10% p.a. with annual compounding. If the yield rises by 50 basis points, the approximate fall in price using modified duration is:

The price falls by about ₹19.09. Modified duration is 4.2 divided by 1.10, which is 3.818. Multiplying by the 0.5% rise in yield gives a fall of about 1.909%, which is ₹19.09 on a ₹1,000 bond.

  1. A₹19.09Correct
  2. B₹21.00
  3. C₹38.18
  4. D₹17.36

Explanation

Modified duration = 4.2 / 1.10 = 3.818. Percentage price change ≈ -3.818 × 0.5% = -1.909%. On ₹1,000 this is a fall of about ₹19.09. Using Macaulay duration directly gives ₹21.00, which skips the division by (1+y). ₹38.18 uses a 100 bp move.

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