clearlycanadian

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) increase by $0.75.

B) decline by $0.75.

C) increase or decrease by $0.75.

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

clearlycanadian

In addition to effective duration, analysts often use measures such as Value–at–Risk (VaR) to estimate the price sensitivity of bonds to changes in interest rates because these measures also incorporate the effects of:

A) time to maturity.

B) embedded options.

C) yield volatility.

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The volatility of a bond’s yield should be considered along with the bond’s effective duration when estimating its price sensitivity to interest rates. Measures of price risk such as VaR account for yield volatility. Effective duration includes the effects of time to maturity and embedded options.