Monday, November 21, 2011

Price Value of a Basis Point (PVBP)

CFA Level 1 - Fixed Income Investments

This measure is the absolute value of the change in price of a bond for a one basis point change in yield. It is another way to measure interest-rate risk. It does not matter if it is an increase or decrease in rates, because such a small move in rates will be about the same in either direction according to the second property of a bond's price . This is also know as Dollar Value of an 01 (DV01).
Formula 14.18

 PVBP = initial price- price if yield is changed by 1 basis point

Example: Price Value of a Basis Point
Assume that the initial price is 98 and the new price is 97.75.   Because of a 1 bps increase in rates the PVBP would be .25 (98 - 97.75).

DV01 is related to duration. It is just a special case of dollar duration. Instead of using a 100 basis point change you are simply using a 1 basis point    change.

An example using the Stone & Co. bonds with duration of 5.5

5.5 * 0.0001 * 100 = .055% change

If the price was 98 the dollar price change would be:

.055% * 98 = \$ 0.53

Conclusion
Congratulations! You just finished a section on one of the more complicated topics on your upcoming exam. Ensure you practice all examples presented in this section. We also recommend attempting several different practice exams on Fixed Income with Investopedia's CFA Level 1 Quizzer.

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