CMA Final · Strategic Financial Management · Risks in Financial Market
A firm holds a bond portfolio worth Rs 200 crore with modified duration of 4.5. If yields rise by 40 basis points across the curve, what is the approximate change in portfolio value using duration alone?
The portfolio falls by about Rs 3.60 crore. Using modified duration, the percentage price change is 4.5 times the 0.40% yield rise, which is 1.8%, and 1.8% of Rs 200 crore is Rs 3.60 crore. The loss arises because bond prices move inversely to yields.
- AFall of Rs 3.60 croreCorrect
- BFall of Rs 9.00 crore
- CRise of Rs 3.60 crore
- DFall of Rs 0.36 crore
Explanation
Change = -ModD x change in yield x value = -4.5 x 0.004 x 200 = -Rs 3.60 crore. A rise rather than a fall is the sign error. Rs 9.00 crore treats the yield change as 1%. Rs 0.36 crore misplaces the decimal in the basis point conversion.
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