Key Rate Duration
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?
Key rate duration is a measure of how a security's value changes when its yield changes by 1% for a certain maturity.
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