In the financial market many investors prefer for investments in bond portfolio which can provide them the decent yields with a lower level of volatility than equities. Further, the bonds issued by corporates offer with a higher income than the money market funds or bank instruments. However, the volatility in interest rate in the financial market mostly affects the value of bonds than the equities. The unexpected fluctuation in interest rate in the market may result into decline in the value of a bond.Here, the amount of interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market.
Basis points refer to smallest measure used in quoting yeilds or interest rate on deposits, fixed income products and credit facilities. One basis point is equal to one one-hundredth of one percentage point (0.01%). Therefore, 100 basis points would be equivalent to 1% or a basis point is one hundredth of one percent.
The basis point value (BPV) denotes the change in the price of a bond given a basis point change in the yield of the bond. Basis Point Value tells us how much money the positions will gain or lose for a 0.01% parallel movement in the yield curve. In the other words, the basis point value quantifies the interest rate risk for small changes in interest rates. The sensitivity depends on two things, the bond’s time to maturity, and the coupon rate (interest rate) of the bond. Longer the duration of the bond, Basis Point Value tends to be higher.
