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

A bond priced at USD 102.00 (per USD 100 face) has its yield fall from 4.00% to 3.99%, and its price rises to USD 102.0612. Another bond with the same face amount is priced at USD 90.00 and has a DV01 per USD 100 face of 0.0540. Which statement is correct?

The first bond's DV01 is 0.0612 per USD 100 face, the price change for a one basis point yield move. This exceeds the second bond's 0.0540, so the first bond is more price sensitive. Its modified duration is 6.0, not 6.12.

  1. AThe first bond has a DV01 of 0.0612 and is more sensitive per USD 100 face than the second bond.Correct
  2. BThe first bond has a DV01 of 0.0612 and is less sensitive per USD 100 face than the second bond.
  3. CThe first bond has a DV01 of 0.612 and is more sensitive per USD 100 face than the second bond.
  4. DThe first bond has a DV01 of 0.0612 and has a modified duration of 6.12.

Explanation

The first bond's price change for 1bp is 102.0612 − 102.00 = 0.0612, so DV01 = 0.0612, which exceeds 0.0540. Modified duration is 0.0612/(102 × 0.0001) = 6.0, not 6.12, so option 4 is wrong. Option 3 is a scale error.

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