CMA Final · Strategic Financial Management · Risks in Financial Market
A firm has an asset with a modified duration of 4.5 years and a market value of Rs 80 crore. If yields rise by 50 basis points, what is the approximate change in value using duration only?
The value falls by about Rs 1.80 crore. Modified duration of 4.5 multiplied by the 0.5% yield rise gives a 2.25% price decline, applied to Rs 80 crore. The sign is negative because bond prices move inversely to yields.
- ADecrease of Rs 1.80 croreCorrect
- BIncrease of Rs 1.80 crore
- CDecrease of Rs 3.60 crore
- DDecrease of Rs 0.18 crore
Explanation
Change = -4.5 x 0.005 x 80 = -1.80 crore. An increase has the wrong sign. Rs 3.60 crore uses 1% rather than 0.5%.
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