Amount of change in price of a bond in response to 1 basis point change in yield is Dollar value of a basis point (DVBP) or Dollar value of one basis point change (DV01).
A basis point is a one hundredth percentage i.e. 0.01%. The term basis point is used in fixed income market to measure change in interest rates.
Calculating DVBP
Going back to the formula that we derived for price sensitivity of a bond,dP/P = Modified Duration * dr
Change in dollar value of a bond is dP
dP= Modified Duration X Price of the bond X dr
DVBP = Modified Duration X Price of a bond X 0.01/100
For the bond that we considered for calculating the duration, modified duration is -4.134987/(1+ 0.12) = -3.692
DVBP = -3.692 X 1000 X 0.01/100 = -0.369
That is for an increase in one basis point interest rate will reduce bond price by 0.37
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Sathish Emmadi
Sathish Emmadi is a co-founder & editor at Lastbull.com. He is presently working in IT for one of the world’s top mutual fund companies. Handled multiple projects in BFSI (Banking,Financial Services and Insurance) domain. An Engineering Graduate from NITW.
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