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

Mr. Iyer holds a bond with a modified duration of 5. If market yields rise by 50 basis points, the approximate change in the bond's price is:

The bond price falls by approximately 2.5%. Price change is roughly negative modified duration multiplied by the yield change, so 5 times 0.50% gives 2.5%. Because yields rise, price moves in the opposite direction and declines.

  1. AIncrease of 2.5%
  2. BDecrease of 2.5%Correct
  3. CDecrease of 5.0%
  4. DDecrease of 0.25%

Explanation

Price change is approximately -modified duration x change in yield = -5 x 0.50% = -2.5%. Yields rising lowers price, so the sign is negative. Using 5% ignores that 50 bps is 0.5%.

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