How Bond Coupon Rates Affect Duration and DV01
Summary
The document explains why a vanilla bond’s duration and DV01 can move in opposite directions as its coupon changes. Duration describes price sensitivity relative to the bond’s value, while DV01 measures the approximate dollar price change for a one basis point yield move. The choice of measure therefore depends on whether risk is being compared per dollar invested or per dollar of face value.
The discussion distinguishes lower coupon bonds as riskier per dollar invested from higher coupon bonds as riskier per dollar of face value. The latter have the risk of the lower coupon bond plus the present value sensitivity of their additional coupon payments. It also clarifies that bond traders do use DV01, also called dollar duration, when they focus on dollar exposure; other duration measures, such as modified and Macaulay duration, are distinct concepts. The explanation is qualitative and does not specify bond maturity, yield, or portfolio context, all of which can affect practical risk comparisons.
Key ideas
- Duration expresses bond price sensitivity relative to invested value.
- DV01 estimates the dollar price change for a one basis point yield move.
- Lower coupon bonds have greater relative risk per dollar invested.
- Higher coupon bonds have greater dollar risk per unit of face value in the comparison described.
- Traders often use DV01 when they need to measure or hedge dollar exposure.
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Full text
# Duration and DV01 vs coupon rate # Duration and DV01 vs coupon rate For a vanilla bond, as coupon goes down ,absolute duration goes up, but absolute dv01(absolute change in price for a 1bp increase in rates ) goes down. so ... what is the message to take away from this... which is riskier! Edit: Perhaps the answer to my question is , that it depends on what matters to you: your % return on investment, or your dollar P&L. For % ROI , duration is the measure to use , and for dollar P&L, DV01 is the one to use. I would think that traders would care more about dollar P&L since the traders job is to hedge the market risk over the life of the trade , so my follow up q is - why do Bond traders look at duration rather than DV01 ? ## Answer by Mats Lind (score 1) https://quant.stackexchange.com/a/32547 - Per USD invested, the lower coupon bond is risker. - Per USD face value, the higher coupon bond is riskier. 2.) is trivial because the higher coupon bond constitutes of the original bond plus a series of positive coupons. The two has the same sign of their its risk, i.e. they lose present value with higher yield. So the higher coupon bond is riskier, it has the risk of the lower coupon bond plus the risk of the extra coupons. Looking at 1.) and partitioning it into the repayment and the coupons; consider that that the repayment is riskier per amount invested as it is longer than the coupons. Then a reallocation towards the repayment through decreasing the coupons is a reallocation towards the riskier constituent, hence lower coupons increse the relative risk. ## Answer by Will Gu (score 1) https://quant.stackexchange.com/a/32580 Edit: I've got a chance to talk with a risk manager. The conclusion is that DV01 is used more by traders simply because they care more about the actual dollar value. Portfolio managers may use duration instead because they get compensated in a different way. Some relevant discussions are available on this Wikipedia page. According to Wikipedia, dollar duration and DV01 are essentially the same thing. Dollar duration is a common risk measure. Your question "why do Bond traders look at duration rather than DV01 ?" is a little mis-postulated. Bond traders do look at DV01 aka dollar duration. Other durations (Modified, Macauley, etc.) are different concepts.
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