FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01
A bond has a modified duration of 6.5 and a full price of USD 98.40 per USD 100 face value. A fund holds USD 50 million face value of this bond. Using the approximation DV01 = modified duration × price × 0.0001, what is the position's DV01?
The DV01 is USD 31,980. Market value is USD 49.2 million (50 million × 98.40%), and multiplying by modified duration of 6.5 and by one basis point (0.0001) gives the dollar price change per basis point. Face value must not be used.
- AUSD 31,980Correct
- BUSD 32,500
- CUSD 3,198
- DUSD 31,200
Explanation
Market value = 50,000,000 × 0.9840 = USD 49,200,000. DV01 = 6.5 × 49,200,000 × 0.0001 = USD 31,980. Using face value instead of market value gives USD 32,500, which is wrong because DV01 depends on market value. USD 3,198 is a decimal-place error.
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