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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

An investor chooses between two debt funds. Fund X has a modified duration of 6 years and Fund Y has 2 years. If market interest rates rise by 1%, approximately what happens to the NAVs?

Fund X's NAV would fall about 6% and Fund Y's about 2%. Bond prices move inversely to yields, and the approximate change equals modified duration multiplied by the yield change, so the longer duration fund is far more sensitive to a 1% rate rise.

  1. AX falls about 6% and Y falls about 2%Correct
  2. BX falls about 2% and Y falls about 6%
  3. CBoth rise by about 1%
  4. DX rises about 6% and Y rises about 2%

Explanation

Percentage price change is approximately modified duration times the change in yield, with an inverse sign. A 1% rise gives about −6% for X and −2% for Y. Option two swaps the durations; the rises ignore the inverse relationship.

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