Key Rate Duration

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For example, assume bond X has a one-year key rate duration of 0.5 and a five-year key rate duration of 0.9. Bond Y has a key rate durations of 1.2 and 0.3 for these maturity points, respectively.
Using the formula shown above, the bond’s key rate duration would be calculated as follows: Key Rate Duration = (1030 – 980) / (2 * 0.01 * 1000) = 2.5. Significance of the Key Rate Duration. The key rate duration reflects the expected change in value resulting from a yield change for a bond or bond portfolio with a specific maturity.
The key rate formula is similar to the effective duration formula, except that it uses 0.01 in the denominator to reflect a 1% (100 basis points) change in the yield at a specific point on the yield curve: Key rate duration = P V – −P V + 2×0.01× P V 0 Key rate duration = P V – − P V + 2 × 0.01 × P V 0. Where:
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.
However, key rate duration is less useful for short-term investments, because the duration of a bond is not the same for different maturities. When it comes to measuring interest rate sensitivity, DV01 or modified duration is an excellent option. Bonds with an embedded put option have a shorter duration. This type of bond is essentially zero ...
So, for example, a 5-year, zero-coupon bond has a 4-year key rate duration of −0.1633 years; if the 4-year par rate increases by 1%, the price of the bond will increase by approximately 0.1633%. A 5-year, 8% coupon bond has a 3-year key rate duration of 0.0838 years; if the 3-year par rate decreases by 1%, the price of the bond will increase by approximately 0.0838%.
More specifically a Key Rate Duration Ki is defined with respect to a given maturity Ti and an absolute one-sided rate shift δ as follows: Ki = (B--B+)/ (2Bδ) Here B- is the bond's present value (dirty price) as calculated by a downwards bumped yield curve YC- described below. B+ is the bond's present value (dirty price) as calculated by an ...
Notice that the 1% coupon bond has the highest key rate duration, which corresponds to the bond’s maturity of 20 years. The higher the coupon rate, the higher the possibility of the bond being called. This means that time to exercise has a greater influence on the key rate duration relative to the time to maturity as the coupon rates increase.
Therefore, the five-year key rate 01 is. and, multiplying by 10,000 and dividing by price, the five-year key rate duration is. The last row of the table adds the key rate 01s and durations. Since the sum of the key rate shifts is a parallel shift in the par yield curve, the sums of the key rate 01s and durations closely match the DV01 and ...
This post explains how to calculate the key rate durations (KRD).Ho (1992) introduces KRD to measure non-parallel movements of the yield curve that the existing duration measures can not describe as these are defined under the assumption of a parallel shift of the yield curve. Key Rate Duration using R code Ho (1992) introduced the concept of the key rate duration (hereafter KRD), which is a ...
Fixed Income - Key Rate Duration. There is no quick explanation! This is a very technical, academic aspect. It all depends on the notion of the par bond (on the Cognition slides, this is a 5% coupon bond and we have a flat yield curve of 5%). If we hold this bond constant and therefore also hold the yield curve flat at 5%, then if one rate ...
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. When the yield curve changes in a non-parallel manner, key rate durations (and not the portfolio ...
Key Rate Durations of Various Bonds Not only does the key rate duration of a bond depend on the bond’s maturity (compared to the maturity of the key rate), it also depends on the bond’s coupon rate compared to its YTM; i.e., it depends on whether the bond is priced at par, at a premium, or at a discount. Using our 4% flat yield curve, here are the key rate durations for five 5-year, option ...
The key rate duration will be (1750 – 1250) / (2 * 0.01 * 1575) = 15.87 The Importance of the Key Rate's Time Duration The predicted change in value resulting from a change in the yield on a bond or bond portfolio with a given maturity is represented by the key rate duration.
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Case Study #1: Key Rate Duration Adjustment Using Futures. Assume you are a portfolio manager (PM) with $10 Billion exposure to U.S. interest rates. The portfolio is diversified across the yield curve according to the maturity allocations of the WGBI.
The key rate duration is considered a superior metric to effective duration. It is because the effective duration metric is only applicable to parallel shifts in interest rates and the yield curve. It shows the yield an investor is expecting to earn if he lends his money for a given period of time. ...
Duration is a measure of the sensitivity of the price -- the value of principal -- of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Bond ...
Once this has cleared up, we can address the key rate duration question. Let's say the key rates are 2y, 5y, 10y, and 30y, and we now apply a 5-year key rate shift. How much would the 10-year par bond price change? The answer is exactly 0. After applying the 5-year key rate shift, the 10-year par yield hasn't changed.
1 Duration measures the sensitivity of a bond’s price to changes in interest rates. Bonds with longer duration have higher sensitivity to changes in interest rates. Important Information. This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
It is a measure of the time required for an investor to be repaid the bond’s price by the bond’s total cash flows. The Macaulay duration is measured in units of time (e.g., years). The Macaulay duration for coupon-paying bonds is always lower than the bond’s time to maturity. For zero-coupon bonds, the duration equals the time to maturity.
I thought that key rate durations were a tool to manage yield curve more effectively and therefore be able to estimate a change in price more accurately. I used the following formula to calculate this change in price with KR durs: Chg in P = [ D1, D2, D3, D4 ] * [ Chg in Y1, Chg in Y2, Chg in Y3, Chg in Y4 ] * P 1:4 being the key rate term.
Dollar and Dow Nervous Anxiety Before Powell and Key Inflation Reading. Aug 25, 2022 7:00 PM -07:00 John Kicklighter, Chief Strategist. Dow, Liquidity, Volatility, Recession, Jackson Hole and ...
Key-Rate Duration is computationally similar to Modified Duration, except that it accounts for non-parallel shifts in the yield curve. For example, the magnitude of a yield shift will differ for a 1-Year treasury compared to a 10 Year bond. Using key rate duration, we can assume non-parallel yield shifts across different maturities, thus ...
Although they're not really explicit about it being a par rate that they're changing, it becomes clear when you look at one of their tables and see that, for example, a 10-year par bond has a 3-year key rate duration of 0.00 years, and a 10-year discount bond has a 3-year key-rate duration that is negative; those durations would have to be ...
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Rate duration bond yield bonds year price change curve maturity durations interest time duration. sensitivity shift rates coupon example using formula value portfolio effective will assume fiveyear maturity. parallel given shifts measure nonparallel curve. rates..


What is Key Rate Duration?

The key rate duration is considered a superior metric to effective duration.