• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
Finance Train

Finance Train

High Quality tutorials for finance, risk, data science

  • Home
  • Data Science
  • CFA® Exam
  • PRM Exam
  • Tutorials
  • Careers
  • Products
  • Login

Key Rate Duration

CFA® Exam, CFA® Exam Level 2, Fixed Income Securities

This lesson is part 13 of 17 in the course Fixed Income Part 1

Effective duration calculates the approximate change in a bond’s price given a 100 basis point (1%) move in interest rates as part of a parallel shift in the yield curve.

When the yield curve shifts in a non-parallel manner, the portfolio’s effective duration cannot be used to estimate the change in portfolio value.

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’s effective duration) must be used to estimate the change in portfolio value.

Key rate duration is calculated using the following formula:

Key Rate Duration = \frac{P_{-} - P_{+}}{2 \times 1 \% \times P_{0}}

Where:

P– = Price with a 1% decrease in yield

P+ = Price with a 1% increase in yield

P0 = Original price

On the Treasury spot curve, there are 11 maturities. So, key rate duration can be calculated for each maturity. The sum of all key rate durations on the yield curve will be equal to the effective duration.

In order to estimate a portfolio’s change in value in the event of a non-parallel yield curve shirt, an analyst will need to perform a weighted average calculation utilizing the key rate durations to the portfolio’s weights at different maturities (i.e., the percent invested at two year, five year, ten year, and twenty year bonds).

Previous Lesson

‹ Theories of the Term Structure of Interest Rates

Next Lesson

How to Calculate Interest Rate Volatility? ›

Join Our Facebook Group - Finance, Risk and Data Science

Posts You May Like

How to Improve your Financial Health

CFA® Exam Overview and Guidelines (Updated for 2021)

Changing Themes (Look and Feel) in ggplot2 in R

Coordinates in ggplot2 in R

Facets for ggplot2 Charts in R (Faceting Layer)

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

In this Course

  • CFA Level 2: Fixed Income Part 1 – Introduction
  • Principles of Credit Analysis
  • High Yield Corporate Debt (aka Junk bonds)
  • Analyzing Credit of Asset Backed Securities
  • Analyzing Credit of Municipal Bonds
  • Sovereign Debt
  • Three Shapes of the Yield Curve
  • Parallel and Non-parallel Shifts in Yield Curve
  • Factors Driving Treasury Investment Returns and Bond Price Risk
  • Yield Curve Construction with Treasuries
  • LIBOR Swap Rate Curve
  • Theories of the Term Structure of Interest Rates
  • Key Rate Duration
  • How to Calculate Interest Rate Volatility?
  • Benchmark Yield Spreads
  • Valuing an Option Embedded Bond using Binomial Interest Rate Tree
  • How to Price Convertible Bonds?

Latest Tutorials

    • Data Visualization with R
    • Derivatives with R
    • Machine Learning in Finance Using Python
    • Credit Risk Modelling in R
    • Quantitative Trading Strategies in R
    • Financial Time Series Analysis in R
    • VaR Mapping
    • Option Valuation
    • Financial Reporting Standards
    • Fraud
Facebook Group

Membership

Unlock full access to Finance Train and see the entire library of member-only content and resources.

Subscribe

Footer

Recent Posts

  • How to Improve your Financial Health
  • CFA® Exam Overview and Guidelines (Updated for 2021)
  • Changing Themes (Look and Feel) in ggplot2 in R
  • Coordinates in ggplot2 in R
  • Facets for ggplot2 Charts in R (Faceting Layer)

Products

  • Level I Authority for CFA® Exam
  • CFA Level I Practice Questions
  • CFA Level I Mock Exam
  • Level II Question Bank for CFA® Exam
  • PRM Exam 1 Practice Question Bank
  • All Products

Quick Links

  • Privacy Policy
  • Contact Us

CFA Institute does not endorse, promote or warrant the accuracy or quality of Finance Train. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Copyright © 2021 Finance Train. All rights reserved.

  • About Us
  • Privacy Policy
  • Contact Us