Price Value of a Basis Point (PVBP)
Candlefocus EditorIn investing, the price value of a basis point typically measures the incremental cost from one bond to another. Bonds of similar maturity and coupon rate should have similar PVBP, as long as there are no major liquidity issues or availability problems in the market. When comparing bonds of similar maturity and coupon rate, but with different PVBP, then it is often assumed that the difference in PVBP reflects the liquidity or availability issues in the market.
PVBP is calculated by subtracting the price of the bond from the yield to maturity. It is generally expressed in terms of one percent of the bond’s value, which is one basis point (1 bp). A bond with a price of $97 and a yield to maturity of 6.5% will have a PVBP of 0.15. The investor would then pay an extra 0.15% when compared to a similar bond with a 6.35% yield.
The concept of PVBP is important to consider when making investments, as it can often help to identify when there are potential issues that may otherwise be difficult to spot. When considering two bonds with a similar level of maturity, coupon rate and yield to maturity, a difference in PVBP can show that one of the bonds may offer a better return for the same amount of risk. It is also important for investors to consider the possible impact of liquidity or availability issues on the PVBP of a investment, as this can lead to a reduced return and increased risk when compared to similar investments.
Overall, the Price Value of a Basis Point (PVBP) is an important tool that can be used to help ensure that an investor is getting the best relative return for their decision. It can also help to identify potential issues that would be difficult to spot otherwise, such as liquidity or availability issues, and this can be invaluable when evaluating the relative return of multiple investment opportunities.