What is the impact of a 50 basis point increase in interest rates on the net asset value of an open-end bond mutual fund holding a seven year, $100 million face value 7 percent annual coupon bond selling at par? The fund has 10 million shares.
A)An increase of $0.24 per share.
B)A decrease of $0.265 per share.
C)An increase of $0.05 per share.
D)A decrease of $0.05 per share.
E)An increase of $0.265 per sharE.

Question

Quizplus · Accepted Answer

A 50 basis point increase in interest rates would result in a decrease in the bond's price. Using bond math, the new price of the bond would be $94.39. Therefore, the total value of the bond holding would decrease to $94.39 million. We can calculate the fund's new net asset value (NAV) by subtracting any fund expenses from the total value and dividing by the number of shares: $94.39 million - Expenses / 10 million shares. Assuming no change in expenses, the new NAV would be $9.439 per share, a decrease of $0.265 per share from the previous NAV of $9.704 per share (the original $100 million face value bond selling at par). Therefore, the correct answer is B.

What Is the Impact of a 50 Basis Point Increase