What Is a Basis Point Value?

The base point price value refers to the change in bond price when the yield to maturity changes by one basis point, that is, 0.01 percentage point. The price of the base point is the absolute value of the price change. The relative value of the price change is called the percentage of price change. It is the absolute value of the price change relative to the initial price. price.

Basis point value

Right!

The base price value is

The following example illustrates what a basis point price value is.

1 Basis point value example 1

There are three types of bonds, A, B, and C. The interest is paid once every six months, and the next interest payment is after half a year. The relevant information is as follows: Calculate their base point price values separately.

Solution: Increase the yield by one basis point, from 8% to 8.01%. It can be calculated that the new bond prices are: 99.9595 yuan, 99.9321 yuan, 99.9136 yuan, and the price changes -0.0405 yuan, -0.0679 yuan, and -0.0864 The base point price is 0.0405 yuan, 0.0679 yuan and 0.0864 yuan.

Reduce the yield by one basis point, from 8% to 7.99%. The new bond prices are: 100.0406 yuan, 100.0680 yuan, and 100.0865 yuan, the price changes by 0.0406 yuan, 0.0680 yuan, and 0.0865 yuan, respectively, and the basis point price values are 0.0406 yuan. $ 0.0680 and $ 0.0865.

It can be seen that the value of the base point price when the yield rate rises or falls by one basis point is approximately equal. The price change caused by falling yields should be larger than the price change caused by rising equivalent yields. However, because the change in yields is small (only one basis point), the price fluctuations caused by rising or falling yields are Roughly equal.

2 Basis Point Value Example 2

A bond portfolio consists of the bonds in the example above. Among them, investors hold A100 bonds, B300 bonds, and C1000 bonds. Calculate the base point price value of the bond portfolio. Solution: What is required here is the basis point price value of the bond portfolio. We can first find the base point price value of each bond based on the base point price value of each bond, and then get the base point price value of the entire bond portfolio.

Calculation of bond portfolio base point price value

In determining the investment strategy, in addition to the price value of the basis point, investors often calculate the price fluctuations when the change in the rate of return is greater than one basis point. The calculation of the price fluctuation value when the rate of return changes arbitrarily many basis points is similar to the calculation of the price value of the basis point. We use an example to illustrate.

Example: Using the conditions in the above example, calculate the price fluctuations of three bonds when the yield rate changes by 10 basis points and 100 basis points, respectively.

Solution: Increase the yield by 10 basis points from 8% to 8.1%. It can be calculated that the new bond prices are: 99.5955 yuan, 99.3235 yuan, and 99.1406 yuan, and the price fluctuations have changed by 0.4045 yuan, 0.6765 yuan, and 0.8594. yuan.

Reduced the yield by 10 basis points from 8% to 7.9%. The new bond prices were: 100.4066 yuan, 100.6825 yuan, and 100.8699 yuan, and the price fluctuations changed by 0.4066 yuan, 0.6825 yuan, and 0.8699 yuan, respectively.

Combining the results of the value of the base point in the above example, we can sum up a rule: when the rate of change in the rate of return is small (for example, 10 basis points), the rate of change in the rate of n points is approximately n times the price of the point of change. Because the change in the rate of return is small, the price fluctuations caused by falling or rising yields are still roughly equal, and the asymmetry of price fluctuations can be ignored.

If we continue to increase the range of yield fluctuations and increase the yield by 100 basis points from 8% to 9%, we can calculate that the new bond prices are: 96.0436 yuan, 93.4960 yuan, and 91.8556 yuan, respectively. Changes were 0.4045 yuan, 0.6765 yuan and 0.8594 yuan.

The yield was further reduced by 100 basis points, from 8% to 7%. The new bond prices were: 104.1583 yuan, 107.1062 yuan, and 109.1960 yuan, and the price fluctuations changed by 4.1583 yuan, 7.1062 yuan, and 9.1960 yuan, respectively.

It can be seen that when the rate of change in the rate of return is large (for example, 100 basis points), the previous approximation method cannot be used to estimate the price fluctuations by n times the price value of the basis point. In addition, as the rate of return fluctuates greatly, the asymmetry of price fluctuations also appears. The price fluctuations caused by falling or rising yields are not the same. We usually use the average of the two as the value of price fluctuations. In this example, when the yield changes by 100 basis points, the value fluctuations of the three bonds are:

Bond A: (3.9564 + 4.1583) /2=4.0574 yuan

Bond B: (6.5040 + 7.1062) /2=6.8051 yuan

Bond C: (8.1444 + 9.1960) /2=8.6702 yuan