Page 28 - FINAL CFA II SLIDES JUNE 2019 DAY 9

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

Key Rate Duration (KRD)
Superior for measuring the impact of nonparallel yield curve shifts. Captures sensitivity of the
value of a security (or a bond portfolio) to changes in a single par rate, holding all other spot
rates constant. It isolates price sensitivity to a change in the yield at a particular maturity only.

Conceptually, we could determine the KRD for the five-year segment of the yield curve by
changing only the five-year par rate and observing the change in value of the portfolio.

Keep in mind that every security or portfolio has a set of KRDs: For example, a bond portfolio
may have interest rate risk exposure to only three maturity points on the par rate curve:

• 1-year, With KRDs represented by:
• 5-year, and D = 0.7,
1
• 25-year maturities D = 3.5, and
5
D 25 = 9.5, respectively.

The model for yield curve
risk durations would be:

r1, r2, r2 are the returns for each security in the portfolio…