CMA Final · Strategic Financial Management · Risks in Financial Market
A portfolio manager at a Mumbai fund house holds a bond portfolio worth Rs 50 crore with a modified duration of 4.2. If yields rise by 50 basis points across the curve, what is the approximate change in portfolio value using duration?
The portfolio falls by about Rs 1.05 crore. Price change is approximately minus modified duration times yield change, so 4.2 x 0.5% = 2.1% fall, and 2.1% of Rs 50 crore equals Rs 1.05 crore. Bond prices move inversely to yields.
- AFall of Rs 1.05 croreCorrect
- BRise of Rs 1.05 crore
- CFall of Rs 2.10 crore
- DFall of Rs 0.84 crore
Explanation
Percentage change = -modified duration x change in yield = -4.2 x 0.50% = -2.10%. Value change = 2.10% x Rs 50 crore = Rs 1.05 crore fall. Rs 2.10 crore results from forgetting to convert 50 bps to 0.5% and misapplying it as 1%. A rise would ignore the inverse price-yield relation.
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