Question

You own a bond portfolio worth $28,000. You estimate that your portfolio has an average YTM of 6.9% and a Modified Duration of 7 years. If your portfolio's average YTM were to decrease by two basis points, what would be the approximate new value of your portfolio?

Answer 1

Answer:

$Modified Duration = \frac{Duration}{ / (1 + Yield to Maturity)}$

$Modified Duration = \frac{7}{(1+0.069)}$

$Modified Duration = \frac{7}{(1.069)}$

Modified Duration = 6.55%

It identified that 1% change in Yield to maturity leads to 6.55% change in Price in opposite direction.

0.02% decrease move to increase by 6.55% * 2%  = 0.1310%

$New Portfolio Value = Old Value (1+g)$

$New Portfolio Value = 28,000 (1+0.001310)$

New Portfolio Value = $ 28,000 × 1.001310

New Portfolio Value = $ 28,036.68