The modified duration of a 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?
A. Increase of $2,500
B. Decrease of $2,500
C. Increase of $25,000
D. Decrease of $25,000
B
When yields increase bond prices decrease. The proportional decrease is the modified duration times the yield increase. In this case, it is 5×0.0005=0.0025 . The decrease is therefore 0.0025×1,000,000 or $2,500 .
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