## Fixed Income

rishabhhurkat
Good Student
Posts: 25
Joined: Wed Dec 09, 2015 9:29 am

### Fixed Income

Please Explain the Concept of Key Rate Duration with suitable example

What is Parallel and Nonparallel Shifts in Yield Curve?

edupristine
Finance Junkie
Posts: 704
Joined: Wed Apr 09, 2014 6:28 am

### Re: Fixed Income

For a given change in interest rates ( X), the change in bond prices ( Y) is different for various maturities; it is represented by a non-parallel change in yield curve.
For such cases, the effective duration could not capture the impact of change in price for a change in interest rate. Hence, key-rate durations are utilized. It measures the impact of change in bond price at a specific maturity keeping the impact on other tenors constant.
Eg: P0 = 100. Key rate duration obtained for 1 year alone.

Tenor Change in X Change in Y Key rate duration
1 year 1% -\$10 10/(2*0.01*100) = 5
2 year 1% 0 Impact studied only for 1 year maturity ( Y for 2 years could be -\$20)