Key Rate Duration

Key Highlights

• Key Rate Duration (KRD) indicates how sensitive a bond or portfolio is to interest rate changes at particular points along the yield curve, which charts rates across various maturities.

• KRD = (P⁻ − P⁺) / (2 × 0.01 × P₀)

What is Key Rate Duration (KRD)?

Key Rate Duration (KRD) indicates how sensitive a bond or portfolio is to interest rate changes at particular points along the yield curve, which charts rates across various maturities. Unlike standard duration, which assumes all rates move together, KRD zooms in on individual maturities, giving a clearer picture of interest rate risk.

What It Measures?

KRD shows how sensitive a bond or portfolio is to a 1% (100 basis points) change in interest rates at a specific maturity, while assuming other maturities stay unchanged. This is especially helpful for bonds with unique features (like callable bonds or mortgage-backed securities) or when the yield curve moves unevenly—think flattening, steepening, or twisting.

How It’s Calculated?

KRD = (P⁻ − P⁺) / (2 × 0.01 × P₀)

• P⁻: Bond price after a 1% rate drop

• P⁺: Bond price after a 1% rate rise

• P₀: Original bond price

This calculation is done for each key maturity point to map out risk across the yield curve.

Why It Matters?

KRD helps investors and portfolio managers:

• Pinpoint which parts of the yield curve affect their investments most

• Fine-tune hedging strategies and bond choices

• Navigate fixed-income risks with accuracy and confidence

It’s a go-to tool for navigating complex interest rate changes.

Limitations

• KRD assumes only one point on the yield curve shifts at a time, which isn’t always realistic.

• The total of all KRDs equals a portfolio’s effective duration, which applies to uniform rate shifts.