CFA Level IFixed IncomeMedium
A fixed-income portfolio has a market value of $50,000,000 and a modified duration of 6.2. Using the money duration approach, estimate the portfolio's price value of a basis point (PVBP).
- A$310,000
- B$31,000
- C$3,100
- D$6,200,000
Show answer & explanationAnswer & explanation
Correct answer: B. $31,000
Money duration = Modified duration × Market value = 6.2 × $50,000,000 = $310,000,000. PVBP = Money duration × 0.0001 = $310,000,000 × 0.0001 = $31,000. This represents the approximate dollar price change in the portfolio for a 1 basis point change in yield.
Why the other options are wrong
- A. This is the money duration change for a 10 bp move, not 1 bp (off by a factor of 10).
- C. This results from mistakenly using 0.00001 instead of 0.0001 in the PVBP calculation.
- D. This is simply modified duration × market value without applying the basis point scaling factor.
Money Duration & PVBP
Money duration converts modified duration into a dollar sensitivity measure by multiplying by market value; PVBP is the dollar price change for a 1 bp yield shift.
- Money Duration = Modified Duration × Market Value (or Full Price).
- PVBP = Money Duration × 0.0001.
- Useful for hedging and comparing dollar exposure across bonds of different sizes.
Memory trick: Money duration turns 'percent sensitivity' into 'dollar sensitivity' — then shrink by 0.0001 for PVBP.