NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities
Ms. Rao, aged 45, plans to sell a 5-year bond portfolio before maturity. A bond has modified duration of 4.5 and is priced at Rs 1,000. If market yields rise by 50 basis points, the approximate price change using duration is closest to:
The price falls by about Rs 22.5. Using modified duration, the price change is minus 4.5 times the 0.5% yield rise, or minus 2.25%, which on a Rs 1,000 bond equals Rs 22.5. Rising yields reduce bond prices.
- AIncrease of Rs 22.5
- BDecrease of Rs 22.5Correct
- CDecrease of Rs 45.0
- DDecrease of Rs 4.5
Explanation
Percentage price change ≈ -modified duration x change in yield = -4.5 x 0.5% = -2.25%. On Rs 1,000 this is a fall of Rs 22.5. Rs 45 uses a 1% change, and a rise is the wrong sign.
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