4.12.2005

Q&A: What's the PVBP of a 10%, 15-year bond...

...selling for $125.50?

A

  • Yield: Nper = 15*2, Pmt=10%*100, PV=-125.50, FV=100, leads to Rate=3.6%*2 = 7.2%
  • Modified Duration: With Excel's MDuration, Settlement = "January 1, 2005", Maturity = "January 1, 2020" (any dates would do as long as maturity is 15 years), Coupon = 10%, Yield = 7.2%, Frequency = 2, leads to 8.50.
  • PVBP = Duration x Bond Price / 100^2 = $0.11

Another approach is to raise the yield by 1 basis point, then solve using PVBP = abs( initial price - PV(7.21%) ).

Followup Question: assume in the above example that the market interest rate is expected to shoot up by 200 basis points, what is the expected change in bond price?

-8.50 * 2% = -17%

Category: C++ Quant > Debt > Valuation

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