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Reading 67: Introduction to the Measurement of Interest Rate

Session 16: Fixed Income: Analysis and Valuation
Reading 67: Introduction to the Measurement of Interest Rate Risk

LOS j: Calculate the price value of a basis point (PVBP), and explain its relationship to duration.

 

 

The price value of a basis point (PVBP) of a bond is $0.75. If the yield on the bond goes up by 1 bps, the price of the bond will:

A)
decline by $0.75.
B)
increase by $0.75.
C)
increase or decrease by $0.75.


 

Inverse relationships exist between price and yields on bonds. The larger the PVBP, the more volatile the bond’s price.

The price value of a basis point (PVBP) for a 18 year, 8% annual pay bond with a par value of $1,000 and yield of 9% is closest to:

A)
$0.80.
B)
$0.44.
C)
$0.82.


PVBP = initial price – price if yield changed by 1 bps.

Initial price:

Price with change:

FV = 1000

FV = 1000

PMT = 80

PMT = 80

N = 18

N = 18

I/Y = 9%

I/Y = 9.01

CPT PV = 912.44375

CPT PV = 911.6271

PVBP = 912.44375 – 911.6271 = 0.82
PVBP is always the absolute value.

TOP

The price value of a basis point (PVBP) for a 7-year, 10% semiannual pay bond with a par value of $1,000 and yield of 6% is closest to:

A)
$0.64.
B)
$0.92.
C)
$0.28.


PVBP = initial price – price if yield changed by 1 bps.

Initial price:

Price with change:

FV = 1000

FV = 1000

PMT = 50

PMT = 50

N = 14

N = 14

I/Y = 3%

I/Y = 3.005

CPT PV = 1225.92

CPT PV = 1225.28

PVBP = 1,225.92 – 1,225.28 = 0.64
PVBP is always the absolute value.

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