CMA Final · Strategic Financial Management · Risks in Financial Market
Meenakshi Textiles Ltd has a bond portfolio with a modified duration of 4.5. If market yields rise by 50 basis points (0.50%), what is the approximate percentage change in the portfolio value?
The portfolio value falls by about 2.25%. Percentage price change equals negative modified duration times the yield change, so 4.5 times 0.50% gives 2.25%, and since yields rise, bond prices fall, making the change a decrease.
- AIncrease of 2.25%
- BDecrease of 2.25%Correct
- CDecrease of 9.00%
- DDecrease of 0.225%
Explanation
Approximate price change = -Modified duration x change in yield = -4.5 x 0.50% = -2.25%. A rise in yields lowers bond prices, so the sign is negative. An increase of 2.25% ignores the inverse relation; 9.00% wrongly divides by 0.5 rather than multiplying.
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