Per 100 FV question

[mbbx5va2]

Hi

A quick one. Concept around when they quote bonds or DV01 value as per 100 face value. I want to clarify understanding.

So if quote DV01 as 6 per 100 FV then effectively if the bond value is 1000 then that's just 6*10. DV01.

I think there must be question somewhere that has this wording in BT materials but can't find - I want to practice so I understand - any pointers which questions / part of syllabus I can practice this.

 

[David Harper CFA FRM]

Hi @mbbx5va2 Right, it's a common challenge. It's merely a convention that we quote the DV01 per 100 face amount. So if you just quote me, without context, "DV01 equal to $6.00" then I will assume "DV01 equal to $6.00 per 100 face amount" such that, see my link below (I just picked one among several historical discussions), I'm going to multiply $6.00/$100.00 by whatever face amount. If the face amount is $1,000 (per your example), then the actual DV01 = $6.00/$100.00 * $1,000.00 Face = $60.00 because this is the price change approximated by a one basis point decline in the yield. In this way, if you look at Tuckman's book (for example) he consistently applies the DV01 in the fractional X.##/100 format. I hope that's helpful,

See here at https://forum.bionicturtle.com/thre...able-regression-hedge-tuckman.6996/post-73753

"Hi @JulioFRM Indeed 5.3 basis points = 0.00053 = 0.0530%, but the formula uses the DV01 of 0.040 (because DV01 is quoted "per 100 face value," actually the 0.040 is divided by 100 to get the actual "dollar value per 1 basis point" of 0.00040; i.e., 0.00040 is the bond's dollar value change per $1.00 in face value of bond, but this is by convention quoted as a DV01 of 0.040 which means a $0.040 bond dollar value change per $100.00 face value given a one-basis decline in the yield).

So, the key is that the $0.040/$100 DV01 is a dollar change per one basis point; i.e., per 0.01% or per 0.00010. So it is correct to use the corresponding 5.3 basis points for the standard error (just like Tuckman uses 3.82 basis points, not 0.000382 in his formula 6.14, upon which my question is modeled). I do appreciate your question because I did have to think about it, and reference Tuckman. The units of DV01 are already sometimes confusing. Your question is good (IMO), I like your attention to detail here. Thanks!"

 

[mbbx5va2]

Thanks for this