It's been 2 years since my last post, and now I'm writing for the purpose of documenting my recent discovery in work. So, I have recently learned how to compute a BPV of an interest rate swap financial instrument. Usually, we would just take the DV01 value from any of the database (e.g. Bloomberg), but the technical side is quite simple I've decided to share it with everybody. So, the computation looks like this:-



The interest is computed by = (Notional amount x interest rate x tenure/360)
The discount factor is computed by = (1/((1+interest rate)^NPER))
Float (+1bps) = (Interest rate + 1/100x1%)
The PV is computed by = (Interest x discount factor)
NPV is computed by = (TOTAL PV (Fixed) - TOTAL PV (Float))

NPV of an IRS facility is computed by finding the difference between the PV of the total fixed interest paid, and PV of the total floating interest paid. So, a basis point value (BPV) is computed by increasing the NPV of an instrument by 1 bps and comparing it to normal arrangement. For those who don't understand, 1 basis point (bps) equals to 1/100 of 1% (i.e. .01%).

This is helpful in assessing the sensitivity of the instrument to changes in interest rate. I hope my explanation is sufficient for those who are just starting the accounting profession. I'm sure there are more accurate and complicated ways of doing this, but for me this is enough.