What is key rate duration?
What is key rate duration?
Key rate duration measures how the value of a debt security or a debt instrument portfolio, generally bonds, changes at a specific maturity point along the entirety of the yield curve.
Is Key rate duration same as effective duration?
The key rate duration is considered a superior metric to effective duration. It is because the effective duration metric is only applicable to parallel shifts in interest rates and the yield curve – when interest rates for all the various bond maturities simultaneously increase or decrease by the same amount.
How is CFA duration calculated?
The modified duration is calculated by dividing the dollar value of a one basis point change of an interest rate swap leg, or series of cash flows, by the present value of the series of cash flows. The value is then multiplied by 10,000.
What are the three types of duration?
Duration – Definition, Top 3 Types (Macaulay, Modified, Effective Duration)
What is key rate?
The key rate is the specific interest rate that determines bank lending rates and the cost of credit for borrowers. The two key interest rates in the U.S. are the discount rate and the federal funds rate.
What does negative key rate duration mean?
For example, a 6-year zero-coupon bond will have a slightly higher price (because the 6-year spot rate is lower) when the 5-year key rate is increased; in other words, a 6-year zero-coupon bond will have a negative 5-year key rate duration.
What does key rate mean?
How is duration calculated?
The formula for the duration is a measure of a bond’s sensitivity to changes in the interest rate, and it is calculated by dividing the sum product of discounted future cash inflow of the bond and a corresponding number of years by a sum of the discounted future cash inflow.
Is Modified duration a percentage?
Key Takeaways. Modified duration measures the change in the value of a bond in response to a change in 100-basis-point (1%) change in interest rates.
What are the two types of duration?
There are two types of duration: Macaulay duration and modified duration.
What is the annual key rate?
What Is the Key Rate? The key rate is the specific interest rate that determines bank lending rates and the cost of credit for borrowers. The two key interest rates in the U.S. are the discount rate and the federal funds rate.
What is a key rate hike?
The Fed’s quarter-point hike in its key rate, which it had pinned near zero since the pandemic recession struck two years ago, marks the start of its effort to curb the high inflation that followed the recovery from the recession. The rate hikes will eventually mean higher loan rates for many consumers and businesses.
