Question

Suppose I have a $1 million worth of bond portfolio whose duration is 20. If the interest goes up by 80 basis point, how much do I make or lose with my portfolio?

Answer 1

Duration of 20 means, if the Interest rate goes up by 1 percent, then portfolio value goes down by 20%.

Here Interest rate is going up by 80BP, that is 0.8%, so Portfolio value will go down by

= 20 * 0.8%

= 0.16

So the new value of the bond portfolio will be

= Original Value * (1 - 0.16)

= 1,000,000 ( 1 - 0.16)

= 840,000

So you lose 160,000 in the portfolio value as the portfolio has decreased from 1M to 840,000

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