# Understanding the Price Value of a Basis Point (PVBP) in Bond Pricing

## What Does Price Value of a Basis Point (PVBP) Mean?

Price value of a basis point (PVBP) measures the sensitivity of bond prices to interest rates. It represents the expected change in a bond's price if the yield increases by one basis point, or 0.01%.

Since bond prices have an inverse relationship to their yield, understanding this measure allows investors to estimate their risk due to interest rate fluctuations. Bond prices are also affected by other factors, like the time to maturity and credit ratings.

The price value of a basis point is also called the value of a basis point (VBP), dollar value of a basis point (DVBP), or basis point value (BPV).

### Key Takeaways

*   The price value of a basis point (PVBP) measures the change in a bond's price due to a 0.01% change in yield.  
    
*   PVBP is also known as the value of a basis point (VBP), dollar value of a basis point (DVBP), or basis point value (BPV).  
    
*   Investors use PVBP to understand bond price volatility in response to changes in interest rates.  
    
*   A higher PVBP indicates greater sensitivity in bond price to interest rate fluctuations.  
    
*   PVBP can be calculated using the formula: Modified Duration x Dirty Price x 0.0001.

![PVBP](https://www.investopedia.com/thmb/OvGOJyu5ZUtdoOgiJo1ru1ekshg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/PriceValueofaBasisPoint-792207af2f5e4f20996943f71a133025.png)

**

## Exploring How Price Value of a Basis Point (PVBP) Works

The price value of a basis point is a method of measuring the [price sensitivity](https://www.investopedia.com/terms/p/price-sensitivity.asp) of a bond. This is often established by assessing the absolute change in the price of a bond if the required yield changes by one [basis point](https://www.investopedia.com/terms/b/basispoint.asp) (BPS). In other words, PVBP is the price change of a bond when there is a .01% (one basis point) change in the yield. Price volatility is the same for an increase or a decrease of one basis point in required yield.

Because this measure of price volatility is in terms of dollar price change, dividing the PVBP by the initial price gives the percentage price change for a 1-basis-point change in yield. Since there is an inverse relationship between bond price and yield, as bond prices fall by decreasing dollar amounts, their yields increase, and vice versa. The degree of change in bond price for each basis point change in yield is determined by a number of other factors, such as the bond's [coupon rate](https://www.investopedia.com/terms/c/coupon-rate.asp), time to maturity, and [credit rating](https://www.investopedia.com/terms/c/creditrating.asp).

A higher price value of a basis point indicates a larger change in the bond's price when interest rates fluctuate. You can estimate PVBP using the formula: Modified Duration x Dirty Price x 0.0001. The modified duration measures the proportional change in the price of a bond for a unit change in yield. It is simply a measure of the weighted average maturity of a fixed income security’s cash flows. As yields fall, modified duration increases and a higher [modified duration](https://www.investopedia.com/terms/m/modifiedduration.asp) implies that a security is more interest-rate sensitive. The [dirty price](https://www.investopedia.com/terms/d/dirtyprice.asp) factored into the formula is defined as the total price paid for a bond after including [accrued interest](https://www.investopedia.com/terms/a/accruedinterest.asp) on the date of purchase.

> **Important**
>
> A basis point represents 1% of 1%.

## Example: Calculating the Price Value of a Basis Point

Let’s assume an analyst wants to understand how a price change for a bond will affect the value of the security if yields change by 100 basis points. The par value of the bond purchased at par is $10,000, and the price value of a basis point is given as $13.55.

PVBP = modified duration x $10,000 x 0.0001

13.55 = modified duration x 1

Modified duration = 13.55

This means if rates decrease by 100 basis points (or 1%), the bond's value will rise by 13.55%, equating to $1,355 on a $10,000 bond.

Another way to look at this is to remember that the PVBP is the price change of a bond when there is a 1 basis point change in the yield. In this case, the PVBP is $13.55. Therefore, a change of 100 basis point in the yield will be $13.55 x 100 = $1,355.

## What Is DV01 in Finance?

In finance, the dollar value of a basis point, or DV01, is a measure of how the price of a bond changes in response to a change in yield. It is also known as the present value of one basis point, or PV01.

## What Does PV01 Tell You About a Bond?

The PV01, or preset value of a basis point, tells you how sensitive a bond's price is to changes in the interest rate. A high PV01 means that the bond's price is exceptionally sensitive and will experience a sharp drop in value if interest rates increase.

## How Do Interest Rates Affect Bond Prices?

Bond prices are inversely related with prevailing interest rates in the secondary market. When the prevailing interest rate is higher than a bond's yield, bondholders must accept a discount in order to sell their bonds, in order to compensate for the higher yield of competing issues. When a bond's yields are higher than the prevailing interest rates, bondholders can sell them at a premium, knowing that the market will pay more for higher-paying bonds.

## The Bottom Line

The price value of a basis point, abbreviated as PV01 or DV01, represents the dollar value of a 0.01% increase in a bond's interest rate. This measure allows investors to estimate the interest rate risk associated with fixed income investments.

A high PV01 indicates that the bond is highly susceptible to interest rate fluctuations, and a significant change in yield will result in lower bond prices. However, there are other factors that influence bond prices, including issuer credit ratings and the time to maturity of a given bond.