A method of measuring the price sensitivity of a fixed-income security in monetary terms. This reflects absolute change in the value of a bond due to a 1 basis point change in interest rates or required yield. Typically, as this price (known for short as PVBP) increases, the dollar price volatility, also, increases. This means a bigger price value of a basis point means a bigger move in the bondâ€™s price due to a given change in interest rates. The PVBP can be calculated by first finding out the price change using the following formula:

where:

CÂ Â is the dollar value of coupon payments in one year

NÂ Â is the number of coupon payments not yet made

YÂ Â is BEY or bond equivalent yield (decimal)

100Â means the calculation relates to par value

For instance, assume a 20-year bond with 10% coupon rate and yield of 8%: that is, C = 10, N= 40, Y= 0.9. We can calculate the change in price due to 1% change in yield by plugging the above figures in the formula. It turns out that Î”p = USD 12.35.

PVBP = Î”p/ 100 = 12.35/100= 12.35 cents. Therefore, a 1 basis point increase (decrease) in interest rates will lead to a USD 12.35 decrease (increase) inÂ the bond price.

The price value of a basis point is also known as the dollar value of a basis point (DV01).

privacy policybefore submission of your comments or any suggestions. Please keep comments relevant, respectful, and as much concise as possible. By commenting you are required to follow our community guidelines.## Comments