Key rate duration
Sensitivity to a change in one maturity on the curve, holding the rest still. It shows where the exposure sits, which a single duration figure hides.
Where you will meet it
Key rate duration appears in 7 learning outcomes on the CFA syllabus. A few of them:
- Explain key rate duration and what it is used for
“Key rate duration measures a bond's or portfolio's sensitivity to a change in the benchmark yield at one specific maturity, holding the others constant.”
- Explain how to measure a bond's sensitivity to each factor that moves the yield curve, and how to use those sensitivities to manage yield curve risk
“Exposure to each can be measured with key rate durations, the sensitivity to a move in one point of the curve with the others held fixed.”
- Explain how bond indexes are built and why managing a portfolio to track one is hard
“Managers therefore match the index's primary risk factors rather than its holdings: duration and key rate durations, sector and quality weights, issuer exposure, cash flow distribution and convexity.”
- Set out the measures used to gauge risk and return in a bond portfolio and how bonds co-move with other assets
“Spread duration measures sensitivity to credit spreads, and key rate durations show exposure to shifts at particular maturities.”
Practise it
Practise key rate duration until it is automatic: questions that explain every wrong option.
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