Question

The modified duration of your client’s bond portfolio worth $1 million is 5 years. By approximately how much does the value of the portfolio change if all yields increase by 5 basis points? (Show Work).

Answer 1

Price volatility             = (-Modified Duration) x (potential adverse move in yield)

                                    = (-5) x (.0005) = -0.0025 or -0.25%.

so value of portfolio will fall by = $1000000 x 0.25% = 2500

so change in value of portfolio = 2500 (decline in value) Answer