Saturday, March 24, 2007

DV01 of bonds

Do you know by how much the value of a government bond will change for a unit change in yield? This is defined by the dollar value per basis point (DV01). A good rule of thumb to follow is as follows:
Consider a $1 million investment in government treasury notes of various maturities.
  • 2 year note: 200 USD
  • 3 year note: 300 USD
  • 5 year note: 400 USD
  • 10 year note: 800 USD
  • 30 year bond: 1600 USD

So, if you have a $1 million investment in a 3 year note and the yield increases by 1 basis point, the value of your investent will go down by 300 USD.