Which of the following statements is a correct description of the phrase present value of a basis point?

Which of the following statements is a correct description of the phrase present value of a basis point?
A . It refers to the present value impact of 1 basis point move in an interest rate on a fixed income security
B . It refers to the discounted present value of 1/100th of 1% of a future cash flow
C . It is another name for duration
D . It is the principal component representation of the duration of a bond

View Answer

Answer: A

Explanation:

This is a trick question, no great science to it. Remember that the ‘present value of a basis point’ refers to PV01, which is the same as BPV (basis point value) referred to in the PRMIA handbook. In other textbooks, the same term is also variously called ‘DV01’ (dollar value of a basis point). Remember these other terms too.

PV01, or the present value of a basis point, is the change in the value of a bond (or other fixed income security) from a 1 basis point change in the yield. PV01 is calculated as (Price * Modified Duration/10,000).