What is Key Rate Duration?
Key rate duration is not the same as 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 , five-year bonds, 10-year bonds, and 30-year bonds. That's not often the case in the real world, which is why key rate duration is useful -- it measures a security's price sensitivity to shifts at "key" points along the . Key rates are especially useful for securities with embedded options such as call options or prepayment options..
How Does Key Rate Duration Work?
Why Does Key Rate Duration Matter?
The formula for key rate duration is:
Key Rate Duration = (P- - P+)/(2 * 0.01 * P0)
Where P- = the security price after a 1% decrease in yield
P+ = the security price after a 1% increase in yield
P0 = the original security price
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Believe it or not, investing can be a lot like putting your wardrobe together. You can mix and...Read More →
Gift cards have surpassed all other categories as the most popular gift, according to the National Retail Federation. Here's a news flash, however: If this is the extent of your gift card...Read More →