FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01
An investor holds Bond A with market value $60 million and modified duration 4.0, and Bond B with market value $40 million and modified duration 9.0. What is the DV01 of the combined portfolio?
The DV01 is $60,000. The value-weighted modified duration of the portfolio is 6.0, from (60 x 4 + 40 x 9) / 100. Multiplying 6.0 by the $100 million value and by 0.0001 gives the dollar change per basis point.
- A$60,000Correct
- B$65,000
- C$6,000
- D$600,000
Explanation
Portfolio modified duration is value-weighted: (60 x 4.0 + 40 x 9.0) / 100 = 6.0. DV01 = 6.0 x $100 million x 0.0001 = $60,000. Using the simple average duration of 6.5 gives the wrong figure of $65,000.
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