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Key rate duration is a metric used in bond portfolio management to determine how sensitive a portfolio's value is to yield curve alterations of a modest magnitude. Key rate duration focuses on the portfolio's value's interest rate sensitivity to particular key rates along the yield curve.Â
According to this strategy, a portfolio's sensitivity to interest rate changes might vary depending on where a section of the yield curve moves because interest rates throughout the curve can shift independently of one another.
A portfolio manager must first determine the key rates along the yield curve that are most crucial to the portfolio's value before calculating key rate duration. For instance, the portfolio manager may concentrate on the 10-year and 30-year Treasury rates as the key rates if a portfolio comprises primarily of long-term bonds. The portfolio manager can determine the sensitivity of the portfolio's value to a modest change in each of the key rates once the key rates have been established. To do this, it is necessary to determine the change in the portfolio's value that would occur if each of the main rates changed by one basis point while keeping all other rates constant.
Key rate duration is beneficial because it can aid portfolio managers in having a better understanding of the interest rate risks associated with their holdings and helping them to make wiser investment choices. Managers can get insight into how changes in the yield curve may affect the value of their portfolios by concentrating on the sensitivity of a portfolio's value to particular key rates. They can then adapt their investments accordingly to reduce risks or seize opportunities.
A portfolio manager must first determine the key rates along the yield curve that are most crucial to the portfolio's value before calculating key rate duration. For instance, the portfolio manager may concentrate on the 10-year and 30-year Treasury rates as the key rates if a portfolio comprises primarily of long-term bonds. The portfolio manager can determine the sensitivity of the portfolio's value to a modest change in each of the key rates once the key rates have been established. To do this, it is necessary to determine the change in the portfolio's value that would occur if each of the main rates changed by one basis point while keeping all other rates constant.
Key rate duration is beneficial because it can aid portfolio managers in having a better understanding of the interest rate risks associated with their holdings and helping them to make wiser investment choices. Managers can get insight into how changes in the yield curve may affect the value of their portfolios by concentrating on the sensitivity of a portfolio's value to particular key rates. They can then adapt their investments accordingly to reduce risks or seize opportunities.
