Key rate duration
Key rate duration is not the same as effective duration. Effective duration is an estimate of a security's sensitivity to a parallel shift in interest rates, meaning that it assumes that interest rates change by the same degree for, say, one-year bonds, five-year bonds, 10-year bonds, and 30-year bonds. The key rate formula is similar to the effective duration formula, except that it uses 0.01 in the denominator to reflect a 1% change in the yield at a specific point on the yield curve: Reading 46 LOS 46d: Define key rate duration and describe the use of key rate durations in measuring the sensitivity of bonds to changes in the shape of the Key rate duration is the duration at specific maturity point on the yield curve. Keeping all other maturities constant, key rate duration is a measure of the sensitivity of a bond’s price to a 100 basis point change in yield for a given maturity. Key Rate Duration of a Portfolio. As with Macaulay, modified, and effective duration (see here), the key rate duration of a portfolio is the weighted average of the key rate durations of its constituent bonds, where the weights are based on the market values of the constituent bonds: Key Rate Durations (KRD) have been invented exactly for that purpose. More specifically a Key Rate Duration K i is defined with respect to a given maturity T i and an absolute one-sided rate shift δ as follows: K i = (B--B +)/(2Bδ) Here B-is the bond's present value (dirty price) as calculated by a downwards bumped yield curve YC-described below. One of the most popular techniques to accomplish this is the use of key-rate durations (KRDs), introduced by Thomas Ho (1992). Ho defines a number of maturities on the yield curve as being the key rate durations, with typical values of 3 months, 1, 2, 3, 5, 7, 10, 15, 20, 25 and 30 years.
The appropriate benchmark should reflect the duration and convexity of the just in modified duration and convexity, but also in partial (key-rate) durations too.
Download Table | 1 Key rate yields and durations from publication: Fixed Income Performance Attribution | Fixed-income managers need specialized attribution The duration of a bond is a linear approximation of minus the percent change in its price given a 100 basis point change in interest rates. (100 basis points = 1% Using four portfolio case studies, we show that the use of risk measures such as duration, convexity or key rate durations have some limitations and may not be Definition of key rate duration: A way to measure the sensitivity of a security or a portfolio in relation to a change in yield of 1 percent (100 basis
Using four portfolio case studies, we show that the use of risk measures such as duration, convexity or key rate durations have some limitations and may not be
Keywords: DV01, Duration, Key Rate Duration, Interest Rate Risk, Yield Curve Risk, Dollar Duration, Modified Duration, Partial DV01 JEL Classifications: G10, G12, E43 Paper Introduction Duration and DV01 provide the basic measures for evaluating the sensitivity or risk of fixed income instru-ments and are widely used throughout the financial Key rate duration measures portfolio sensitivity or security sensitivity. Key rate duration is the sensitivity of a portfolio’s (or security’s) value in relation to a 1% change in yield for a given maturity.Duration is the value of a 1% change (100 basis points) in yield for a given maturity.
Effective duration is a duration calculation for bonds that have embedded options. This measure of duration takes into account the fact that expected cash flows will fluctuate as interest rates
The key rate formula is similar to the effective duration formula, except that it uses 0.01 in the denominator to reflect a 1% change in the yield at a specific point on the yield curve: Reading 46 LOS 46d: Define key rate duration and describe the use of key rate durations in measuring the sensitivity of bonds to changes in the shape of the Key rate duration is the duration at specific maturity point on the yield curve. Keeping all other maturities constant, key rate duration is a measure of the sensitivity of a bond’s price to a 100 basis point change in yield for a given maturity. Key Rate Duration of a Portfolio. As with Macaulay, modified, and effective duration (see here), the key rate duration of a portfolio is the weighted average of the key rate durations of its constituent bonds, where the weights are based on the market values of the constituent bonds: Key Rate Durations (KRD) have been invented exactly for that purpose. More specifically a Key Rate Duration K i is defined with respect to a given maturity T i and an absolute one-sided rate shift δ as follows: K i = (B--B +)/(2Bδ) Here B-is the bond's present value (dirty price) as calculated by a downwards bumped yield curve YC-described below. One of the most popular techniques to accomplish this is the use of key-rate durations (KRDs), introduced by Thomas Ho (1992). Ho defines a number of maturities on the yield curve as being the key rate durations, with typical values of 3 months, 1, 2, 3, 5, 7, 10, 15, 20, 25 and 30 years. The key rate duration model describes the shifts in the term structure as a discrete vector representing the changes in the key zero-coupon rates of various maturities. Key rate durations are then defined as the sensitivity of the portfolio value to the given key rates at different points along the term structure.
Duration also plays an important role in bond immunization strategies. Duration measures include Macaulay Duration, Modified Duration, Key Rate Duration,
nodes = [ 1, 2, 5, 7, 10 ] # the durations dates = [ today + Period(n, Years) When you want to calculate a particular key-rate duration, you can Duration also plays an important role in bond immunization strategies. Duration measures include Macaulay Duration, Modified Duration, Key Rate Duration,
Feb 26, 2019 Consequence 2: When the rate shift δ tends to 0, the sum of the Key Rate Durations K must tend to the bond's Modified Duration D. Creating a Oct 8, 2019 The key rate duration presents an improvement to the effective duration because it gives the expected changes in price when the yield curve Apr 10, 2013 Key rate durations are then defined as the sensitivity of the portfolio value to the given key rates at different points along the term structure. Page 4 Effective duration, calculated by parallel shifts of the yield curve, is the standard measure of portfolio-based interest rate risk. Key rate durations, obtained by Hi David, Is key rate exposure the dollar key rate duration? How is it measured? linear regression? Also could you explain the