Long question but the essence is quite simple. My question is why do you divide the PVBP by ten first? I thought the pvbp gives the price change per basispoint so you would just have to multiply it by 10 not divide it by 10 first. Any help would be appreciated: ----- James Walters, CFA, is an active fixed income portfolio manager. He manages a portfolio of fixed income securities worth $7,500,000 for an institutional client. Walters expects a widening yield spread between intermediate and long term securities. He would like to capitalize on his expectations and considers several transactions in a number of different securities. On 01/31/06, Walters expects the yield of the 2-Year Treasury Note to decrease by 10 basis points and the yield of the 30-Year Treasury Bond to increase by 11 basis points. The characteristics of these two fixed income securities are shown in Table 1. Prices are quoted as a percentage of par value and the Price Value of a Basis Point is per $1 million par amount. Table 1 Security Characteristics 2-Year T-Note 30-Year T-Bond Maturity 01/31/08 11/15/35 Bid-Ask Spread (basis points) 5.0 5.0 Coupon 5.375% 6.125% Bid Price 99.7236 104.6086 Ask Price 99.7736 104.6586 Yield to Maturity 5.51% 5.80% Price Value of a Basis Point 186.6484 1461.1733 He also has the three year term structure of interest rates. This is shown in Table 2. Table 2 Term Structure of Interest Rates Year Spot Rate 0.50 5.5227% 1.00 5.5537% 1.50 5.5444% 2.00 5.5205% 2.50 5.5114% 3.00 5.5156% Walters thinks of several different trading strategies that would allow him to take advantage of his expectations. He would like to evaluate each strategy to determine which offers the best risk-return tradeoff. 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? A) $1,866.48. B) $18.66. C) $186.65. D) $0.19. Your answer: A was incorrect. The correct answer was C) $186.65. The change in value is computed as follows: Change in ValueT-Note = Price Value of a Basis Point/10 x (-Yield Change) So we have Price ChangeT-Bond = 186.6484/10 x (-10 bp) = $186.65
I think that is a mistake on their part. There is a thread for this.
Thought so too but wanted to be sure Thanks
No it’s not a mistake, they have different par values: “Prices are quoted as a percentage of par value and the Price Value of a Basis Point is per $1 million par amount.” "What is the best estimate of the change in value of a $100,000 principal position "
Damn gotta learn to fully read the question instead of jumping in Thanks !