# How to discount bonds in HTM portfolio to calculate PV100.

Hello,

I am interested in calculating PV100 (the loss in value by a 1% move of the interest rate curve) of bonds in HTM portfolio. Trading and AFS portfolio losses are calculated by marking to market calculations using the Euro Swap Curve. What would be the most efficient curve to calculate PV100 for bonds in the HTM portfolio? Using the Euro Swap Curve, which is considered risk free somewhat, would not take into account the risk of the bonds included in the portfolio and the impairment that must be applied to them.

Any thoughts?

so…im going to risk sounding stupid here…but when im done studying for level 2 someday will i understand what this guy is asking?

I don’t know what a HTM portfolio is. Nor do I know what an AFS portfolio loss is.

The loss in value of a 1% move in the yield curve sounds like the definition of dollar duration.

So these bonds have interest rate risk associated with them, and the dollar duration will explain that.

For credit and other risks, normally, the duration is the same as the ordinary interest rate risk, it’s just that some bonds don’t have credit risk, so for an entire portfolio, it might not be the same.

If your bonds are euro denominated, it sounds like the Euro swap curve might be the best, or EURIBOR. Of course, nothing in Euros is really risk free anymore.

Then you have to consider if your bonds have risks that are correlated with interest rate risk. For example, if interest rates go up, that will change the price, but if interest rates go up, it’s also possible that the cash flows of the company will go down (panic, recession!) and so the credit risk will also go up simultaneously. Not much you can do to model that except look at scenarios and perhaps stress test.

HTM = Held to Maturity

AFS = Available for Sale.

Bingo. I thought OP was talking about Greek sovereign debt.

OK, that makes sense. Thanks for the acronym translation. So this is corporate treasury, I assume.

all of Intercorporate investments of Level II - coming back to haunt us.

Question that I have is:

a. HTM - why would you need to do any calculation of your PV100 (the term you are using) for a HTM bond? It should be HELD to MATURITY. No calculation of gains/losses. It undergoes periodic Amortization, cannot be sold (if it is sold - that is a violation), isn’t it?

You put the amortized cost on the Balance sheet - if I remember my rusty accounting.

Are you trying to do this for a FV balance sheet(Fair Value Balance sheet)?

Would not the treatment for HTM / AFS / Trading segment be the same in terms of calculation of PV01 or PV100?

As I understand, the fair value differs for these segments - MTM for Trading and AFS, while Cost basis for HTM. And the classification into these segements is based on the intention - not on the risk profile of the bonds. Hence bonds with similar risk profile may be placed in HTM as well as the Trading / AFS segment.

HTM segment bonds can thus suffer the same treatment as accorded to the other segments. A swap curve would be the correct one to calculate the PV01 and thus the Carrying and Recoverable amounts for the Impairment calculations.