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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Financial Management

Case: Anand Finserve, an NBFC-linked advisory firm, evaluates a debt mutual fund for client Ms Iyer. The fund's portfolio has modified duration of 4 years. Market yields are expected to rise by 50 basis points. What is the approximate percentage change in the fund's NAV?

The NAV would fall by about 2 percent. Percentage price change is approximately negative modified duration multiplied by the yield change, so 4 times 0.50 percent gives 2 percent, and the sign is negative because rising yields reduce bond prices.

  1. AIncrease of 2.0%
  2. BDecrease of 0.5%
  3. CDecrease of 2.0%Correct
  4. DDecrease of 8.0%

Explanation

Approximate price change = -modified duration x change in yield = -4 x 0.50% = -2.0%. An increase is wrong because bond prices move inversely to yields. Decrease of 8% wrongly uses 200 bps.

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