Allocating bond portfolio by PVBP

CFA Level III Fixed Income
#1

So the official problem in the curriculum is as follows:

Prégent and Hirji expect changes in the curvature of the yield curve but are not sure whether curvature will increase or decrease. Hirji first analyzes positions that would profit from an increase in the curvature of the yield curve. The positions must be duration neutral, and the maximum position that the Malaysian client can take in long-term bonds is C$150 million. Hirji notes that interest rates have increased by 100 basis points over the past six months. Selected data for on-the-run Canadian government bonds are shown in Exhibit 2.

Maturity** YTM (%) Duration PVBP (C$ millions)** 2-year 1.73 1.97 197 5-year 2.01 4.78 478 10-year 2.55 8.89 889 Long-term 3.16 19.60 1,960

Based on Exhibit 2, the amount that Hirji should allocate to the 2-year bond position is closest to:

  1. C$331 million.
  2. C$615 million.
  3. C$1,492 million.

Correct answer is C. Can someone please explain the use of PVBP in determining exposure allocation?

#2

Pvbp is nothing more than duration that accounts for money. If you dont use pvbp, what strategy would you use to calculate?

#3

Ahhh, right. The duration is engraved in PVBP formula…must pay attention next time. Thanks