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

A bond position has face value $10,000,000, trades at a price of 95 per 100 of face, and has a modified duration of 4.5. Using duration only, what is the estimated loss in value if yields rise by 25 basis points?

The estimated loss is $106,875. Market value is $9.5 million, so DV01 is 9,500,000 × 4.5 × 0.0001 = $4,275 per basis point, and multiplying by 25 basis points gives $106,875. Using face value would overstate the loss.

  1. A$112,500
  2. B$106,875Correct
  3. C$10,688
  4. D$1,068,750

Explanation

Market value = 10,000,000 × 0.95 = $9,500,000. DV01 = 9,500,000 × 4.5 × 0.0001 = $4,275. For 25 bp the estimated loss is 4,275 × 25 = $106,875. Using face value instead of market value gives $112,500, which is the wrong base.

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