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NEW QUESTION: 1



A. Option D
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Answer: B

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NEW QUESTION: 3
An investor holds a portfolio of mortage backed securities valued at $100m. Using a Monte Carlo based pricing model, he determines that the value of the portfolio would rise to $102m if interest rates were to fall by
45 basis points, and fall to $97m if interest rates were to rise by 45 basis points. What is the estimated modified duration of the investor's portfolio?
A. None of the above
B. 5.56
C. 0
D. 11.12
Answer: B
Explanation:
Explanation
For fixed income portfolios where standard cash flow discounting models are not available, duration calculations are based upon estimated price moves in response to a change in rates. Recall that we define duration as the percentage change in price expected for a 1% change in yield. In this case, we have three price points known to us:
Line | Price | Yield
a | $102 | r - 45bps
b | $100 | r
c | $ 97 | r + 45bps
(where r is the current yield)
The change in price from line a to line c is $102m - $97m = $5m. We use the middle point, ie $100m, to calculate the percentage change. Therefore the percentage change in price is $5m/$100m = 5%.
The change in yield between lines a and c is 90 basis points [=(r+45bps) - (r-45bps)]. In other words, the change in price is 5% for a 90 bps change in yield. So the duration can be calculated as 5/(90/100) = 5.56. The other answers are incorrect.

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