Dollar Value of a Basis Point

 

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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June 15, 2008 | Filed Under Bonds 

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