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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities

Bond A has a modified duration of 4.5 and Bond B has a modified duration of 6.0. A client holds Rs 10 lakh in Bond B alone, with a market yield of 7%. If yields rise by 50 basis points across the curve, approximately what is the change in value of the holding, ignoring convexity?

The holding falls by about Rs 30,000. Approximate price change equals negative modified duration times yield change: 6.0 × 0.5% gives 3%. Applied to Rs 10 lakh, that is Rs 30,000. Bond A's duration is irrelevant because the client holds only Bond B.

  1. AFall of about Rs 30,000Correct
  2. BFall of about Rs 22,500
  3. CRise of about Rs 30,000
  4. DFall of about Rs 3,000

Explanation

Percentage price change ≈ -modified duration × change in yield = -6.0 × 0.5% = -3%. On Rs 10,00,000 this is a fall of Rs 30,000. Rs 22,500 wrongly uses Bond A's duration, and Rs 3,000 misplaces the decimal.

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