Value at risk

mayankmundhra30
Good Student
Posts: 23
Joined: Sat Jun 25, 2016 8:13 am

Value at risk

1) Mr. Mathews has been asked by his supervisor to compare various bonds. Assuming all other things being constant, bonds of equal maturity will have different DV01 per USD 100 Face Value. Their DV01 per USD 100 Face Value will be in the following sequence of lowest value to Highest Value:
a. Zero Coupon Bonds, Par Bonds, Premium Bonds Correct
b. Premium Bonds, Par Bonds, Zero Coupon Bonds Incorrect
c. Premium Bonds, Zero Coupon Bonds, Par Bonds Incorrect
d. Zero Coupon Bonds, Premium Bonds, Par Bonds Incorrect
DV01 is certain multiple of Dirty Price (which includes Coupons) and not Clean Price. Thus, it is proportional to Base Price, which is Dirty Price. Ordinarily, Premium Bond will have the highest (dirty) price followed by Par Bond and with the least price of Zero Coupon Bond. Hence, DV01 of Premium Bond is the highest while that of Zero Coupon Bonds is the lowest.

Could you please explain in a better way?

2) Jack Johnson is using the key rate shifts to analyze the effects of yield changes on bond prices. Assume that the 10-year yield is 7% and it has increased by 10 basis points to 7.1%. This increase in yield decreases linearly to 5 basis points for 20-year yield. What is the effect of this increase in yield for 16-year yield if it is 7.5% before the increase?
a. Increase by 3 basis points to 7.53% Incorrect
b. Increase by 3 basis points to 7.13% Incorrect
c. Increase by 2 basis points to 7.52% Correct
d. Increase by 2 basis points to 7.12% Incorrect
how to do this?

edupristine
Finance Junkie
Posts: 704
Joined: Wed Apr 09, 2014 6:28 am

Re: Value at risk

Hi Mayank

1. DV01- A way of determining what a bond's value would be with regard to a change in price in comparison to the decrease in yield on that bond. This method shows the dollar value of an interest rate drop of one basis point.
DV01 is price value of a basis point given by formula - delta P / (10000 * delta y).
premium bond will have the highest price followed by par bond and with the least price of zero coupon bonds.

mayankmundhra30
Good Student
Posts: 23
Joined: Sat Jun 25, 2016 8:13 am

Re: Value at risk and FMP

Dear Sir/Mam

If DV01 of premium bond is more more than zero cpoupon bond then could you please clear my doubt then why zero coupon bond is more impacted by interest rate changes and has high duration than coupon bearing bond.

What is the relation between DV01 and duration?