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Question:

Consider a newly issued, seven‐year, 5% annual‐pay bond that is priced at 106 per 100 of par to yield 4%. The price value of a basis point for this bond is closest to:

A
$0.06.

Explaination

PV+ can be calculated as:

N = 7; FV = 100; PMT = 4; I/Y = 4.01; CPT PV; PV = $105.94

PV– can be calculated as:

N = 7; FV = 100; PMT = 4; I/Y = 3.99; CPT PV; PV = $106.06

The price value of a basis point can be computed as:

PVBP = (106.06 − 105.94) / 2 = $0.06 per 100 of par value

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