Skip to content

FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01

A 2-year bond pays a 5% annual coupon and has a yield to maturity of 5% per year (annual compounding), so it is priced at par. A portfolio holds USD 50 million face value of this bond. What is the approximate DV01 of the position?

The DV01 is about USD 9,297. Macaulay duration is 1.9524 years, modified duration is 1.9524 divided by 1.05, or 1.8594. Multiplying by 0.0001 and the USD 50 million position value, the par price makes market value equal face, gives roughly USD 9,297 per basis point.

  1. AUSD 9,297Correct
  2. BUSD 9,762
  3. CUSD 8,854
  4. DUSD 18,594

Explanation

PVs per 100 face: 4.7619 and 95.2381. Macaulay duration = (4.7619 x 1 + 95.2381 x 2) / 100 = 1.9524. Modified duration = 1.9524 / 1.05 = 1.8594. DV01 = 1.8594 x 0.0001 x USD 50,000,000 = USD 9,297. Using Macaulay duration gives 9,762; dividing by 1.05 twice gives 8,854.

Did you get it right without looking?

One question tells you little. A timed set on Applying Duration, Convexity, and DV01 shows your real accuracy, how long you take and where you lose marks.

Practise Applying Duration, Convexity, and DV01Free diagnostic mock

More Applying Duration, Convexity, and DV01 questions