The \"price value of a basis point\" (PVBP) measures the change in the price of

Question

The "price value of a basis point" (PVBP) measures the change in the price of a bond if the yield changes by one basis point (one one-hundredth of a percentlong dash—0.01%). PVBP is expressed as the absolute value of the change in price. For example, if the yield on a bond rises from 8% to 8.01% and the bond price falls by $0.3992 (on a $1,000 face), then the PVBP is 0.3992. Drawing on your knowledge of the price-yield properties of coupon bonds, which of the following bonds has the highest PVBP?

(Select the best choice below.)

A. 25 years, 8% coupon

B. 10 years, 8% coupon

C. 20 years, 8% coupon

D. 15 years, 8% coupon

E. 5 years, 8% coupon

Explanation / Answer

Since, all bonds couon rates are equal, bond with highest duration will have high % change in price due to change in yield due to convexity effect. Higher duration increases the sensivity of bond price.

Hence, correct option is (A)

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