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Fixed Income Class Notes Chapter 5

Fixed Income Class Notes Chapter 5 - Fixed Income Class...

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Fixed Income Class Notes Chapter 5 – 11/3/11 Interest rate risk of a security may be measured by how much its price changes as interest rates change. One commonly used measure of price sensitivity assumes that all bond yields shift in parallel, that is they move up or down by the same number of basis points. An interest rate factor is any random variable that impacts interest rates in some way. This factor, known as DV01, can be a yield, a spot rate, a forward rate or some other factor. DV01 is an acronym for dollar value of an ’01 (i.e. .01%) and shows the change in the value of a fixed income security for a one basis point decline n rates . A negative sign defines DV01 to be positive if price increases when rates decline and negative if price decreases when rates decline. DV01 is in fact positive most of the time. DV01 should be measured using points relatively close to the rate level in question. A European call option
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