9.8 The Dollar Value of a Basis Point “DV-01”
Question
How much will a bond’s dollar price move if yields (i.e., Y-T-M) move up (or down) by just one basis point (b.p.)?
Note 1: “DV” = dollar value
Note 2: 1 b.p. = 1% × 1% = .01 × .01 = .0001
Given:
| Maturity | 5 Years |
| Coupon | .08 (Semi) |
| YTM | .0837 and |
| .0837 + .0001 = .0838 |
Question
How much will the dollar price change if yields move up by one basis point?
- For now, we assume that the price change will be the same whether yields move up or down.
Solution
| YTM | Dollar Price | |
| .0837 | 98.5000 | |
| .0838 | 98.4602 | |
| Δ Price = | DV – 01 = | 00.0398 |
In comparing bonds, the bond with a lower DV-01 would be considered less volatile.
Question
Can you draw the Price/Yield curve? Note the dollar price would be the vertical axis, while the yield-to-maturity would be the horizontal; the curve would be convex from below.
Note:
The DV-01 addresses the dollar price change for a 1 b.p. change in yield.
We can also calculate the Yield Value of a 32nd. This would address the change in yield accompanying a 1/32 change in price. (A 1/32 move in price is the equivalent of $312.50 per $1 million of par value: 1/32 × .01 × $1 million = $312.50.) This is also known as PV of 32nd.
Hedging:
Both concepts may be used to identify Hedge Ratios, i.e., by comparing the relative values.
