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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
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
Effective duration measures price sensitivity to small parallel shifts in the yield curve.
Effective duration is not an accurate measure of interest rate sensitivity to non-parallel shifts in the yield curve like those
described by 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.)
