CFA CFA Level 1 PVBP

PVBP

  • This topic has 3 replies, 3 voices, and was last updated Oct-238:49 am by pcunniff.
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    • Avatar of pcunniffpcunniff
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        • CFA Level 1
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        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?

      • Avatar of hairyfairyhairyfairy
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          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%.

        • Avatar of pcunniffpcunniff
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            • CFA Level 1
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            thanks!

          • Avatar of crismurraycrismurray
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              • CFA Level 1
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              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 = $1,225.92

              Price if yield changed by 1 bps:
              FV = $1,000
              PMT = $50
              N = 14
              I/Y = 3.001% (yield increased by 1 bps)
              CPT PV = $1,225.28

              PVBP = $1,225.92 – $1,225.28 = $0.64

              Therefore, the correct PVBP for the bond is closest to $0.64.

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