Asked by Riski Prasetyo Putro on May 06, 2024
Verified
You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to increase by 5 basis points, or 0.05%. What is the price value of a basis point?
A) $10,400
B) $14,300
C) $16,500
D) $21,300
Modified Duration
A measure of the sensitivity of the price of a bond or a bond portfolio to a change in interest rates, adjusted for the possibility that the bond may be called before maturity.
Basis Point
A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument, equivalent to 0.01%.
Interest Rates
The fee, shown as a percentage of the principal amount, that a lender imposes on a borrower for the use of assets.
- Grasp the concept and application of hedging with futures contracts and its impact on financial positions.
Verified Answer
MS
Melissa SaffeelsMay 10, 2024
Final Answer :
C
Explanation :
The change in the portfolio's yield will be D* Δy = 11 × 0.05% = 0.55%. The change in the portfolio's value will be 0.55% × $15 million = $82,500. PVBP = Change in portfolio value ÷ Predicted change in yield = $82,500/5 basis points = $16,500.
Learning Objectives
- Grasp the concept and application of hedging with futures contracts and its impact on financial positions.