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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 4.0. If yields across the curve rise by 25 basis points (parallel shift), what is the approximate change in portfolio value?

The portfolio value falls by about Rs 0.50 crore. Price change is modified duration times yield change times value: 4.0 x 0.25% x Rs 50 crore. Rising yields reduce bond prices, so the sign is negative.

  1. ADecrease of Rs 0.50 croreCorrect
  2. BIncrease of Rs 0.50 crore
  3. CDecrease of Rs 5.00 crore
  4. DDecrease of Rs 0.25 crore

Explanation

Approximate change = -Modified duration x change in yield x value = -4.0 x 0.0025 x 50 crore = -0.50 crore. The portfolio falls by Rs 0.50 crore. The increase option has the wrong sign, and Rs 5.00 crore results from using 2.5% instead of 0.25%.

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