From a bond it is known that the worst expected loss in 1 day at 95%...

From a bond it is known that the worst expected loss in 1 day at 95% would be 3.5 basis points and in price it would be $ 4. What is the price of the bond if the modified duration is 8.9 years?

Expert Solution

PVBP = modified duration x $4 x 0.0003.5

8.9*$4 * 0.0003.5

=0.0125

Price of the bond=$4-0.0125

=$3.9875

Price value of a basis point (PVBP) is a measure used to describe how a basis point change in yield affects the price of a bond.

Price value of a basis point is also known as the value of a basis point (VBP), dollar value of a basis point (DVBP), or basis point value (BPV).

Understanding Price Value of a Basis Point (PVBP)

The price value of a basis point is a method of measuring the price sensitivity of a bond. This is often established by assessing the absolute change in the price of a bond if the required yield changes by one basis point (BPS). In other words, PVBP is the price change of a bond when there is a .01% (one basis point) change in the yield. Price volatility is the same for an increase or a decrease of one basis point in required yield.

Because this measure of price volatility is in terms of dollar price change, dividing the PVBP by the initial price gives the percentage price change for a 1-basis-point change in yield. Since there is an inverse relationship between bond price and yield, as bond prices fall by decreasing dollar amounts, their yields increase, and vice versa. The degree of change in bond price for each basis point change in yield is determined by a number of other factors, such as the bond's coupon rate, time to maturity, and credit rating.

ekkarill92 answered 2 years ago

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