Ch.10 · Risk Measures and Ratios · hard
A debt fund has a modified duration of 4 years. If interest rates rise by 0.5%, what is the approximate impact on NAV?
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EXPLANATION
Approximate NAV change = - Modified Duration × Change in Interest Rate = -4 × 0.5% = -2%. A rise in interest rates by 0.5% causes the debt fund's NAV to fall by approximately 2%. This is why long-duration debt funds are risky in a rising interest rate environment — their NAVs fall sharply when rates rise.
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