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

Mr. Arvind Shah, a retired client, wants to reduce interest rate risk in his debt portfolio. Which change would best achieve this?

Shifting to bonds with lower modified duration reduces interest rate risk. Duration measures price sensitivity to yield changes, so shorter-maturity or higher-coupon bonds fall less in price when rates rise, whereas long, low-coupon or zero-coupon bonds are more sensitive.

  1. AShift to bonds with lower modified durationCorrect
  2. BShift to longer-maturity, low-coupon bonds
  3. CShift to zero-coupon bonds of 30 years
  4. DShift to bonds with higher duration

Explanation

Interest rate risk is measured by duration; lower modified duration means a smaller price change for a given yield change. Longer maturity, lower coupon and zero-coupon long bonds all raise duration and so increase the risk.

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