
Explanation:
The price of the bond using the current spot rates is
If all spot rates increase by 5 basis points, the bond price becomes
This implies that the price of the bond has decreased by 0.98 (= 1048.60 − 1047.62)
If all spot rates decrease by 5 basis points, the bond price becomes
This implies that the price of the bond has increased by 0.99 (= 1049.59 − 1048.60)
Now, change in price due to one basis point is and .
DV01 is given by the average of the two.
Therefore,
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Q.51 Suppose that an investor buys a two-year bond with a face value of 1,000 and which pays a coupon of 6% per year. Assume the following are the prevailing spot rates in the market:
| Maturity Period (Year) | Spot Rate |
|---|---|
| 0.5 | 2.0 |
| 1.0 | 2.5 |
| 1.5 | 3.0 |
| 2.0 | 3.5 |
If all spot rates change by 5 basis points, what will be the value of DV01 for the bond?
A
0.985
B
0.099
C
0.197
D
1.06
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