![]() In order to estimate a portfolio’s change in value in the event of a non-parallel yield curve shirt, an analyst will need to perform a weighted average calculation utilizing the key rate durations to the portfolio’s weights at different maturities (i.e., the percent invested at two year, five year, ten year, and twenty year bonds). The sum of all key rate durations on the yield curve will be equal to the effective duration. So, key rate duration can be calculated for each maturity. Key Rate Durations: Measures of Interest Rate Risks. On the Treasury spot curve, there are 11 maturities. K e y R a t e D u r a t i o n = P − − P 2 × 1 % × P 0 Key\ Rate\ Duration = \frac Key R a t e D u r a t i o n = 2 × 1% × P 0 P − − P Key rate duration is calculated using the following formula: define key rate duration and describe the use of key rate durations in measuring the sensitivity of bonds to changes in the shape of the benchmark yield curve CFA® 2023 Level I Curriculum, Volume 5, Module 46. When the yield curve changes in a non-parallel manner, key rate durations (and not the portfolio’s effective duration) must be used to estimate the change in portfolio value. It is important to distinguish interest rate risk from yield curve risk. Keeping all other maturities constant, key rate duration is a measure of the sensitivity of a bond’s price to a 100 basis point change in yield for a given maturity. Using the metric can help investors or financial. Key rate duration is considered an improvement over using the effective duration metric, which can only be applied when. The key rate duration is the sensitivity of the value of a bond to changes in a single spot rate, holding all other spot rates constant. Key rate duration is the duration at specific maturity point on the yield curve. Summary The key rate duration is an important metric for determining possible bond value changes resulting from yield changes. When the yield curve shifts in a non-parallel manner, the portfolio’s effective duration cannot be used to estimate the change in portfolio value. Our numerical results are useful to intuitively understand the risk to a change of interest rates for options embedded in bond.Effective duration calculates the approximate change in a bond’s price given a 100 basis point (1%) move in interest rates as part of a parallel shift in the yield curve. We derive the optimality equation to solve backwardly the bond values and the exercise strategies from the maturity to the initial time. Key rate duration is an important concept in estimating the expected changes in value for a bond or portfolio of bonds because it does so when the yield curveshifts in a manner that is not perfectly parallel, which occurs often. Our stochastic games possess saddle points in pure strategies for each stage game. ![]() It is paramount to keep in mind that the yield for each of the three bonds must change by 100 basis points for this duration measure to be useful. We formulate the valuation problem as a stochastic game or a Markov game. Key rate durations A portfolio duration of 6.413 means that for a 100 basis point change in the yield for each of the three bonds, the portfolio s market value will change by approximately 6.413. The issuer and the holder play a series of stage games in each exercisable node on the lattice whose payoff structure is dependent on the nodes. T Over the last decade, researchers and practitioners have developed a number of methodologies that quantlfjr the interest rate exposure of podolios and securities. As the term structure model of interest rate, we use the Generalized Ho-Lee model that is an arbitrage-free binomial lattice interest rate model. he measurement of interest rate risks embedded in a trade or a portfolio plays a centrd role in the management of fixed-income portfolios. These 11 key maturities are at the three-month and one, two, three, five, seven, 10, 15, 20, 25, and 30-year portions of the curve. The tool is backed by a set of best-of-breed security, portfolio and cash flow analytics, which are supported by more than 40 years of expertise and research. Key-Rate Duration The final duration calculation to learn is key-rate duration, which calculates the spot durations of each of the 11 key maturities along a spot rate curve. We propose a valuation for the bond in which an issuer and a holder are simultaneously granted the right to exercise a call and put options. BondEdge provides investment professionals with the tools to manage risk and returns for multi-asset portfolios relative to an array of leading indices and liability benchmarks. Generalized Ho-Lee Model, Callable Bond, Putable Bond, Stochastic Game, Key Rate Duration Key rate durations, obtained by shifting individual key rates, describe how the risk is distributed along the term structure. Valuation of Game Option Bonds under the Generalized Ho-Lee Model: A Stochastic Game ApproachĪUTHORS: Natsumi Ochiai, Masamitsu Ohnishi (1992) Key Rate Durations Measures of Interest Rate Risks.
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