What is Price Value Of A Basis Point ?

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Price value of a basis point (PVBP) is a measure used to describe how a basis point change in yield affects the price of a bond.Price value of a basis point is also known as the value of a basis point (VBP), dollar value of a basis point (DVBP), or basis point value (BPV).

Definition

The Price Value of a Basis Point (PVBP) is a measure used to describe the impact on a bond's price due to a one basis point change in yield. It is also known as Value of a Basis Point (VBP), Dollar Value of a Basis Point (DVBP), or Basis Point Value (BPV).

Origin

The concept of PVBP originated in the bond market. As financial markets became more complex and bond investing more prevalent, this metric gained widespread use. Its history dates back to the mid-20th century when investors needed more precise tools to measure the impact of interest rate changes on bond prices.

Categories and Features

PVBP is primarily used for fixed-income securities, especially bonds. It is characterized by its ability to quantify the sensitivity of bond prices to interest rate changes. The formula for calculating PVBP is: PVBP = - (ΔP / ΔY), where ΔP is the change in price and ΔY is the change in yield. The advantage of PVBP is its simplicity and intuitiveness, but its drawback is that it is only applicable to small yield changes.

Case Studies

Case 1: Suppose a company's bond is currently priced at $1,000 with a yield of 5%. If the yield increases by one basis point (0.01%), the bond price drops to $995, making the PVBP $5. Case 2: A government bond is priced at $2,000 with a yield of 3%. If the yield decreases by one basis point, the price rises to $2,005, resulting in a PVBP of $5. These cases illustrate the application of PVBP in assessing the impact of interest rate changes on bond prices.

Common Issues

Common issues investors face include how to use PVBP under different market conditions and its distinction from duration. PVBP is suitable for small interest rate changes, while duration is used for larger changes. Additionally, PVBP does not consider the timing of cash flows, whereas duration does.

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