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Finance · level 2

Duration and DV01

Duration turns a yield move into a price move: percentage change equals minus duration times the change in yield. Basis points are just hundredths of a percent.

Theory: Financial Markets & Instruments

Worked example: Price 98, modified duration 3. Yields rise 100bp — price change (in points)?

duration3
yield move100bp
price change-2.94

Step by step

  1. 1

    Duration is a percentage sensitivity

    −3 × 1% = -3%

  2. 2

    Apply to price

    98 × -3% = -2.94 points

  3. 3

    DV01

    0.03 per basis point

  4. 4

    Convexity

    Duration is a straight-line estimate; convexity makes the real fall a touch smaller.

Price 98, modified duration 3. Yields rise 100bp — price change (in points)? = -2.94

The theory behind it

Intuition

Duration is the price sensitivity of a bond: a 1% yield move changes price by roughly duration percent, in the opposite direction.

Common pitfalls

  • ×Ignoring convexity on large yield moves.
  • ×Confusing Macaulay duration (years) with modified duration (sensitivity).

In the interview

Fixed-income and rate-risk rounds.