What is PV 01?
27.3 PV01 describes the actual change in price of a bond if the yield changes by one basis point (equal to one hundredth of a percentage point). It is the present value impact of 1 basis point (0.01%) movement in interest rate. It is often used as a price alternative to duration (a time measure). Higher the PV01, the higher would be the volatility (sensitivity of price to change in yield). Illustration From the modifi ed duration (given in the illustration under 27.2), we know that the security value will change by 1.78% for a change of 100 basis point (1%) change in the yield. In value terms that is equal to 1.78*(102/100) = Rs.1.81. Hence the PV01 = 1.81/100 = Rs. 0.018, which is 1.8 paise. Thus, if the yield of a bond with a Modifi ed Duration of 1.78 years moves from say 9% to 9.05% (5 basis points), the price of the bond moves from Rs.102 to Rs.101.91 (reduction of 9 paise, i.e., 5×1.8 paise).
