fixed income measurement of int rate risk

deepakkrkanodia
Finance Junkie
Posts: 49
Joined: Thu Aug 09, 2012 4:45 pm

fixed income measurement of int rate risk

Postby deepakkrkanodia » Tue Sep 18, 2012 12:46 pm

Q. THE CURRENT PRICE OF A $1000, 7 YEAR, 5.5.% SEMI ANNUAL COUPON BOND IS $1029.23. THE BONDS PVBP IS CLOSET TO:

A $0.05
B $0.60
C $5.74

PLZ TELL THE ANSWER AND HOW IT IS CALCULATED WITH EXPLAINATION

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: fixed income measurement of int rate risk

Postby content.pristine » Thu Sep 20, 2012 11:58 am

Hi Deepak,

I hope you understand what exactly is PVBP.
This question needs to be answered in 3 steps.
Step 1: Find the Yield of the Bond given in the Question.
Step 2: Increase (or Decrease) the Yield by 1 basis point and find the price.
Step 3: The difference between the 2 bond prices is the PVBP

Step 1: Using the TVM keys on your calculator: (remember we are using semi-annual compounding)
Calculator Inputs
N 14
PV -1029.32
PMT 27.5
FV 1000

Calculator Outputs
I/Y 2.50%

That means that the yield of the bond = 2.5%*2 = 5%

Step 2: Increase the yield of the bond by 1bp. Since this is semi-annual compounding, we need to only increase this by .5bp in our calculator:
Calculator Inputs
N 14
I/Y 2.504
PMT 27.5
FV 1000

Calculator Outputs
PV ($1,028.73)

Step 3: Difference between the two bond prices = $0.59.

Hence, B is our answer..

Hope this helps... 8-)


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