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 generally leads to a decrease in the price of existing bonds, as new bonds would be issued at the higher current rate, making the existing bonds less attractive. The net asset value (NAV) of a bond mutual fund holding such bonds would decrease as the market value of the bonds it holds decreases. The exact impact on the NAV per share depends on the duration of the bonds and the size of the interest rate change. In this case, without calculating the exact impact using duration, the correct answer reflects an understanding that the NAV per share would decrease, not increase, and the specific decrease provided in option B is the correct choice given the options presented.

What Is the Impact of a 50 Basis Point Increase