CMA Final · Strategic Financial Management · Interest Rate Derivatives
A portfolio manager holds bonds with a modified duration of 5 and market value of Rs 200 crore. Yields are expected to rise by 50 basis points. Ignoring convexity, what is the approximate change in portfolio value?
The portfolio value falls by about Rs 5 crore. Using modified duration, the percentage change is minus 5 times 0.5%, or minus 2.5%, and 2.5% of Rs 200 crore is Rs 5 crore. Rising yields reduce bond prices.
- AIncrease of Rs 5 crore
- BDecrease of Rs 5 croreCorrect
- CDecrease of Rs 2.5 crore
- DDecrease of Rs 50 crore
Explanation
Change = -ModDur x change in yield x value = -5 x 0.005 x 200 crore = -Rs 5 crore. Option C uses a duration of 2.5; option A has the wrong sign.
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