Key Rate Duration
Key rate duration measures portfolio sensitivity or bond's price sensitivity to independent shifts along the yield curve at selected “key” points (The 13 key points are usually defined as '1M', '3M', '6M', '1Y', '2Y', '3Y', '5Y', '7Y', '10Y', '15Y', '20Y', '25Y', '30Y'). Key rate duration is calculated 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. Key Rate Duration calculates the price response separately for a 1% change in each zero-coupon rate used to calculate the PV of the bond. Gives a better picture of which parts of the term-structure is responsible for how much of total interest rate risk. The key rate durations can then be summed up to give an overall interest rate risk measure, comparable with modified duration. Key rate duration is quoted as a percentage or in basis points.
Read more about this topic: Bond Duration
Famous quotes containing the words key, rate and/or duration:
“Every revolution was first a thought in one man’s mind, and when the same thought occurs in another man, it is the key to that era.”
—Ralph Waldo Emerson (1803–1882)
“I don’t know but a book in a man’s brain is better off than a book bound in calf—at any rate it is safer from criticism. And taking a book off the brain, is akin to the ticklish & dangerous business of taking an old painting off a panel—you have to scrape off the whole brain in order to get at it with due safety—& even then, the painting may not be worth the trouble.”
—Herman Melville (1819–1891)
“Higher than the question of our duration is the question of our deserving. Immortality will come to such as are fit for it, and he would be a great soul in future must be a great soul now.”
—Ralph Waldo Emerson (1803–1882)