Key Rate Durations: Building a Case
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1. Context
In this short video, we build a case for Key Rate Durations – what they are, and for what purpose we may put them to use, specifically in this case, for estimating the percentage price impact of non-parallel shifts in interest rate term structures. We graduate from duration and the understanding we picked of it from reading on One Factor Risk Metrics and Hedges and extend to concept to Key Rate Durations. The formulation assumes that the choice of the key rate is the spot rate – a choice that lends itself to easier understanding of key rate durations than the par rate (par rate as a choice is taken up in the assigned reading). The details of the reading in which this topic appears are given below:
| Area | Valuation and Risk Models |
| Reading | Multi-Factor Risk Metrics and Hedges |
| Reference | Bruce Tuckman, Chapter 5. Multi-Factor Risk Metrics and Hedges In Fixed Income Securities, 3rd Edition, (Hoboken, NJ: John Wiley & Sons, 2011). |