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Up7
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.
Explanation
PVBP = initial price – price if yield changed by 1 bps.
Initial price:
FV = 1000 PMT = 50 N = 14 I/Y = 3% CPT PV = 1225.92
FV = 1000 PMT 50 N 14 I/Y = 3.005 CPT PV = 1225.28
PVBP = 1,225.92 – 1,225.28 = 0.64
My question is – how are you getting 3.005 as a 1bp increase? Shouldnt it be 3.001?
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Up3
You’ll have to account that you’re calculating in semi-annual periods.
So 1 bps = 6% becomes 6.01%, and when counting semi-annually, I/Y = 3% becomes 3.005%.
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Up1
thanks!
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Up0
You are correct. The calculation provided in the explanation is incorrect, and it should indeed be 3.001 as a 1 basis point (0.01%) increase in yield. Let’s recalculate the PVBP using the correct values according to uno online guides:
PVBP = initial price – price if yield changed by 1 bps
Initial price:
FV = $1,000
PMT = $50 (semiannual coupon payment)
N = 14 (number of periods)
I/Y = 3% (yield)
CPT PV = $1,225.92Price if yield changed by 1 bps:
FV = $1,000
PMT = $50
N = 14
I/Y = 3.001% (yield increased by 1 bps)
CPT PV = $1,225.28PVBP = $1,225.92 – $1,225.28 = $0.64
Therefore, the correct PVBP for the bond is closest to $0.64.
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