Page 27 - FINAL CFA II SLIDES JUNE 2019 DAY 9

LOS 34.l: Explain how a bond’s exposure to READING 34: THE TERM STRUCTURE AND
each of the factors driving the yield curve can INTEREST RATE DYNAMICS
be measured and how these exposures can be MODULE 34.6: INTEREST RATE MODELS
used to manage yield curve risks.

MANAGING Effective Duration
YIELD CURVE Measures price sensitivity to small parallel shifts in the yield curve.
RISKS
Yield curve risk
refers to risk to
the value of a
bond portfolio due
to unexpected
changes in the
yield curve.

Effective Duration is not that useful for non-parallel
shifts in the yield curve (shaping risk):

• Changes in portfolio value due to changes in the
shape of the benchmark yield curve. (Note,
however, that parallel shifts explain more than
75% of the variation in bond portfolio returns.)

Hence Key Rate Duration (KRD)…