The \"price value of a basis point\" (PVBP) measures the change in the price of
ID: 2737772 • Letter: T
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)