Bonds have two modes of measuring their value. There's the price of the bond: the amount you would pay to buy it on an open exchange. And there's the interest rate. That figure represents the amount the holder of the bond earns in interest.
PVBP measures the relationship between these two figures. How much does a bond's price react to changes in its interest rate (also known as the yield)?
A basis point measures one hundredth of a percent. So if the yield on your bond rises from 5% to 6%, it rises 100 basis point. A further increase to 6.5% would represent an advance of 50 additional basis points. And so on.
Price value of a basis point shows how sensitive the bond's price is to changes in yield. Increase the yield by a basis point, and how much does the price rise? Answer that question, and you get the PVBP for that bond.
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Finance: What Is a Basis Point?124 Views
finance a la shmoop what is a basis point?
well one percentage point is a hundred basis points, half a percentage is 50
basis points, five percentage points is? yeah we're gonna make you do that one on [frowning man talks to camera]
your own. well the basic idea is that in very large financial transactions those
involved need highly granular computation grids, and basis points
divid interest rates much more tightly. if a company borrows three billion
dollars just noting that the rate is four percent is really vague. it would
need to be noted as four point zero zero percent. why? because just one basis point [equation on screen]
i.e. one hundredth of a percent per year on three billion dollars borrowed
is still a lot of money. that is one basis point on three billion bucks is
300 grand .so basis points are a real thing in high finance transactions and [smiling man talk to camera]
okay okay the answer is 500 basis points. yeah all right now you can go back to
spinning this thingy. [man spins fidget spinner]