C1T4L2 · Revised 2026-10-26

Decision and objectives

Practical task: Compare two debt funds with different interest-rate and currency exposures

Objectives: Compare maturity duration credit and currency risk in debt funds; Estimate a small rate-shock effect; Decompose base-currency return.

Required prior knowledge: C1T4L1. Classification: domestic. Revision: 2026-10-26. All fictional names, prices, rates, fees, calendars and tax schedules below are hypothetical unless explicitly identified as a dated document observation.

A fund holding debt is not the same as a debt security held to its own maturity. The unit holder normally has no fixed repayment date or promised coupon. The manager can replace maturing holdings, so the portfolio can maintain rate exposure indefinitely. Analyze interest-rate sensitivity, issuer credit, currency and redemption mechanics before treating a debt-fund return as cash-like.

Mechanics

Maturity is the time until an individual instrument's final payment. Duration is a cash-flow timing or price-sensitivity measure under a specified definition. A fund's average maturity and duration need not be equal. Credit spread is compensation above a stated benchmark curve for risks including issuer default and liquidity. A currency-denominated holding adds a base-currency translation effect unless an effective hedge offsets it.

Inspect government versus corporate exposure, issuer concentration, subordination, floating-rate terms, benchmark, currency and derivatives. Short duration reduces sensitivity to a parallel rate move; it does not eliminate default losses or a run on illiquid holdings.

Price and return drivers

A first-order estimate is change in price / price ≈ −modified duration × change in yield, with yield change in decimals. It is a local approximation for small, suitably parallel moves and excludes convexity, income and changing credit unless explicitly supplied. For unhedged foreign-currency assets, base-currency growth = local asset growth × exchange-rate growth. Define the exchange quote as TRY per unit of foreign currency.

Worked case

Hypothetical Fund S has modified duration 0.5 years; Fund L has 4 years. Both are TRY debt portfolios, no leverage. A +1 percentage point parallel yield move is +0.01: estimated price effects are −0.5% and −4%, respectively. On TRY 100,000, that is approximately TRY 500 and TRY 4,000 of price loss before income and costs. Suppose L additionally holds 20% in one corporate issue that is marked down 15% for a separate credit event; its first-order contribution is another 3% of total starting value. Avoid adding it to a yield shock that already includes the same spread change.

Independent currency example: a domestic fund's unhedged foreign-currency debt returns −2% in its asset currency while the currency rises 10% against TRY. TRY return is 0.98 × 1.10 − 1 = 7.8% before other costs. A positive TRY outcome does not mean the bond price rose.

Adverse case

If the currency instead falls 8% against TRY while the asset return remains −2%, TRY return is 0.98 × 0.92 − 1 = −9.84%. A longer-duration portfolio may also lose when benchmark yields rise, and a credit deterioration can overwhelm income. If redemption occurs during stress, realized unit value may reflect liquidity discounts. “I will hold the fund until its bonds mature” is incomplete unless the fund itself has a defined termination and distribution schedule.

Practical use

Access a domestic debt fund under its own ordinary or restricted distribution terms. Read KAP holdings, duration disclosures if supplied, valuation policy, currency hedge policy and dealing calendar. Portfolio expenses are generally reflected through unit value under the disclosed accounting; investor fees/taxes remain separate. No actual yield, duration, tax rate or settlement schedule is asserted here. For actual tax-net analysis record income year, investor residence/status, exact fund category, acquisition date and effective rule before applying GIB guidance.

Decision boundaries

A debt fund can serve diversified rate or credit exposure when daily unit-price risk is acceptable. It may fail a fixed short cash need even if every holding has a maturity date. The duration approximation is a stress tool, not a precise quote or a complete risk measure. Defer if the manager's currency hedge, credit quality or valuation policy cannot be determined; a smooth chart is not an alternative to those facts.

Practice and references

Exercise: hypothetical debt fund modified duration 2.5 years, small parallel yield rise 0.8 percentage points, no income or costs in the estimate. Answer: approximate price change = −2.5 × 0.008 = −2%, or TRY 1,500 on TRY 75,000. Separately a foreign asset returns +3% while its currency falls 6% versus TRY: 1.03 × 0.94 − 1 = −3.18%. Explain why neither the first approximation nor the second translation is a promise of the actual redemption value.

Takeaway: debt-fund risk depends on rate sensitivity, credit and currency, not merely the word “bond.”

Reference guide: debt-fund; duration-price-change; currency-return; duration; credit-spread; debt-fund. Next: C1T4L3. Topic test.

Sources: SPK Mutual Funds Introduction Guide — What is a fund; fund expenses; fund types; founder and manager; recorded units; date not stated; retrieved 2026-10-26; checked 2026-10-26; SPK Communique III-52.1 — Articles 3–6, 14–15, 24–27; Annexes 2–3; date 2013-07-09; consolidated text lists amendments through 2024-03-01; checked 2026-10-26. Source records: sources.json. Check the cited rule dates and confirm current dealing terms before any transaction.

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