# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Key Rate Duration

Written By
Paul Tracy
Updated October 16, 2020

What is Key Rate Duration?

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. 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 yield curve. Key duration rates are especially useful for securities with embedded options such as call options or prepayment options.

How Does Key Rate Duration Work?

There are 11 maturities along the Treasury spot rate curve, and a key rate duration is calculated for each. The sum of the key rate durations along a portfolio yield curve is equal to the effective duration of the portfolio.

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

Ask an Expert about Key Rate Duration
At InvestingAnswers, all of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Key Rate Duration.
Be the first to ask a question

If you have a question about Key Rate Duration, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Key Rate Duration, then please ask Paul.

Ask a question Read more from Paul

Read this next

Paul Tracy - profile
Ask an Expert about Key Rate Duration

By submitting this form you agree with our Privacy Policy

Share
close
Don't Know a Financial Term?
Search our library of 4,000+ terms