NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection
A client invests Rs 1,00,000 in a debt fund. The fund has a modified duration of 3 years. If market yields rise by 1 percentage point, what is the approximate change in the value of the investment, other things being equal?
The investment would fall by about Rs 3,000. Modified duration of 3 means value changes roughly 3% for each 1 percentage point move in yield, in the opposite direction, so a 1% yield rise cuts Rs 1,00,000 by about 3%.
- AIncrease of about Rs 1,000
- BDecrease of about Rs 1,000
- CDecrease of about Rs 3,000Correct
- DIncrease of about Rs 3,000
Explanation
Price change ≈ -modified duration × change in yield = -3 × 1% = -3%. On Rs 1,00,000 this is a fall of about Rs 3,000. Option 2 ignores duration, and rising yields cannot raise value.
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