James wants to translate the estimated price change into a change in value of a position in a particular security. What is the best estimate of the change in value of a $100,000 principal position in Treasury Notes if yields change by -10 basis points? Also given: pvbp equals $186.6484 Answers: A) $1,866.48. B) $186.65. C) $18.66. D) $0.19. I had some trouble with this one for some reason, am hoping someone can walk me through it. I’ll post the correct answer eventually.
Is it choice A : 186.6484 * 10 = 1866.48$???
Yield goes down, price goes up. One basis point is worth $186.6484, so 10 basis points will be worth $1866.484. In other words, the price of the bond will go up by $1866.484. So, A/ is the correct answer.
Here’s the answer: Your answer: A was incorrect. The change in value is computed as follows: Change in Value T-Note = Price Value of a Basis Point/10 x (-Yield Change) So we have Price Change T-Bond = 186.6484/10 x (-10 bp) = $186.65 This a schweser qbank question, it’s got me stumped too.
pvbp = Percentage change in Price due to a yield change of 0.01% 186.6484 = Percentage change in Price due to .0001 change in yield pvbp = duration * 0.0001 * bond value 186.6484 = duration * .0001 * 100000 duration = 186.6484 / 10 duration = 18.66484 Therefore for a -10 bp change == change in Price = -duration * -10 = 186.6484
CPK123, Awesome work, thanks.
I still don’t get it. I got the part till duration. Duration is 18.66484. Which implies that if rates go down 1% (100bps), Bond will increase in value by 18.66484%. Thus for a 1% (100 bps) down movement, price will increase by 18.66484% of $100,000 = $18,664.84. so if the yield goes down by 10 bps (10th of a percent), why shouldn’t the price increase by $18,664.84/10 = $1,866.484
Joey or hiredguns1 please help!!! CP
Also, How the hell does a “Treasury note” has a duration of 18.6 years.
Am giving this a shameless bump to see if anybody else has any[thing] to contribute. If not, send it into the depths…
I am inclining towards a mistake in the question, either the notional is $1 million or pvbp is $18.66484
I agree with delhirocks. If I correctly understand Duration, there should not be a way to have the same price change for both 1bp and 10bp change in yield (provided we use the same Duration) Hopefully we will get more opinions on this one
When I first looked at this question I thought it was A. I was waiting to see what others said. I agree with delhirocks that this may be a mistake.
If the pvbp doesn’t equal the price value of a basis point, then the whole world is messed. The answer is just A) and I have no idea what Schweser is smoking.