An 8 year 8% semi-annual bond has a bpv of rs.125. The yeld on the bond has increased by 5 basis points. What is the profit or loss suffered due to increase in yield??
Answers
Answer: The loss suffered on account of a 5 basis point increase in yield is Rs.625.
The BPV or Basis point yield gives us the change in the price of a bond for a one basis point change in the yield of a bond.
We can detrmine the profit or loss with an increase or decrease in yield since bond yield and bond prices are inversely related (they move in opposite directions).
In this case, the BPV increased by 5 basis points. The BPV is Rs. 125.
An increase in the basis point yield causes the price to fall.
Hence the loss suffered due to an increase in yield will be .
A loss of Rs. 625.
This is a mathematical question pertaining to bonds and debentures and therefore, it is important to understand the basics of bonds and debentures and how these are calculated for arriving at the final picture.
These may be slightly different from normal percentage or profit and loss questions as there are certain other aspects to them apart from pure percentage calculations.