NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Scheme Related Information
A mutual fund scheme has a Macaulay-type interest rate sensitivity such that its modified duration is 4. If market yields on its portfolio securities rise by 0.50 percentage point, approximately what is the change in the portfolio value, all else equal?
The portfolio value falls by about 2%. Price change is roughly negative modified duration times the yield change, so 4 multiplied by 0.50% gives 2%, and the sign is negative because yields rose and bond prices move inversely to yields.
- AIncrease of 2%
- BDecrease of 2%Correct
- CDecrease of 0.5%
- DIncrease of 8%
Explanation
Approximate price change = -modified duration x change in yield = -4 x 0.50% = -2%. A rise in yields lowers prices, so an increase is wrong. Using 0.5% ignores duration, and 8% wrongly multiplies by 2 instead of 0.5.
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