Price Value of a Basis Point (PVBP)

What Does Price Value of a Basis Point Mean?

Price value of a basis point (PVBP) is a measure used to depict what a basis point change in yield means for the price of a bond.

Price value of a basis point is otherwise called the value of a basis point (VBP), dollar value of a basis point (DVBP), or basis point value (BPV).

Understanding Price Value of a Basis Point (PVBP)

The price value of a basis point is a method of measuring the price sensitivity of a bond. This is frequently settled by surveying the absolute change in the price of a bond in the event that the required yield changes by one basis point (BPS). At the end of the day, PVBP is the price change of a bond when there is a .01% (one basis point) change in the yield. Price volatility is no different for an increase or a reduction of one basis point in required yield.

Since this measure of price volatility is in terms of dollar price change, separating the PVBP by the initial price gives the percentage price change for a 1-basis-point change in yield. Since there is an inverse relationship between bond price and yield, as bond prices fall by decreasing dollar sums, their yields increase, and vice versa. The degree of change in bond price for every basis point change in not set in stone by a number of different factors, for example, the bond's coupon rate, time to maturity, and credit rating.

A greater price value of a basis point means a greater move in the bond's price due to a given change in interest rates. PVBP can be calculated on an estimated basis from the modified duration as Modified duration x Dirty Price x 0.0001. The modified duration measures the proportional change in the price of a bond for a unit change in yield. It is essentially a measure of the weighted average maturity of a fixed income security's cash flows. As yields fall, modified duration increases and a higher modified duration suggests that a security is more interest-rate sensitive. The dirty price calculated into the formula is defined as the total price paid for a bond subsequent to including accrued interest on the date of purchase.

We should expect an analyst needs to comprehend what a price change for a bond will mean for the value of the security in the event that yields change by 100 basis points. The par value of the bond purchased at par is $10,000, and the price value of a basis point is given as $13.55.

PVBP = modified duration x $10,000 x 0.0001

13.55 = modified duration x 1

Modified duration = 13.55

This means that assuming rates go down 100bp (for example 1%), the value of the bond will increase by 13.55% x $10,000 = $1,355.

One more method for seeing this memorable is that the PVBP is the price change of a bond when there is a 1 basis point change in the yield. In this case, the PVBP is $13.55. In this manner, a change of 100 basis point in the yield will be $13.55 x 100 = $1,355.