Reading 66: Introduction to the Measurement of Interest Rate style, price, border, 2010

honeycfa

LOS i: Compute 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) increase by $0.75.

B) increase or decrease by $0.75.

C) decline 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.

 

honeycfa

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.

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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.

honeycfa

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) $0.92.

B) $0.28.

C) $0.64.

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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.