Introduction

In this chapter, we will delve into the crucial concepts of Key Rate 01 (KRD) and Key Rate Duration. These measures are fundamental in understanding how the value of a fixed-income security or portfolio changes in response to shifts in the yield curve. KRD and Key Rate Duration provide valuable insights for managing interest rate risk and optimizing fixed-income portfolios. Let’s explore these concepts in detail.

Key Rate 01 (KRD)

Key Rate 01, often abbreviated as KRD, is a measure of the sensitivity of a fixed-income security’s or portfolio’s value to a parallel shift in the yield curve at a specific maturity point. In simpler terms, it tells us how much the security’s value will change if the interest rates at a specific maturity point move by 1 basis point (0.01%).

To calculate KRD for a specific maturity point, you can use the following formula:

$$KRD=-\frac{\Delta P V}{\Delta Y}$$

Where:

• $KRD=$ Key Rate 01 for the chosen maturity point.
• $\Delta P V=$ Change in the present value of the security or portfolio due to a 1 basis point change in the yield at the chosen maturity point.

• $\Delta Y=1$ basis point change in the yield at the chosen maturity point.

• Interepretation: A higher KRD value indicates that the security or portfolio is more sensitive to changes in interest rates at the chosen maturity point. Conversely, a lower KRD suggests less sensitivity.

Key Rate Duration

Key Rate Duration, also known as Partial Duration, is a measure of the sensitivity of a fixed-income security or portfolio to a non-parallel shift in the yield curve at a specific maturity point. It provides information on how the security’s or portfolio’s value changes when interest rates at a specific maturity point move while keeping other rates constant.

To calculate Key Rate Duration for a specific maturity point, you can use the following formula:

$$\text{Key Rate Duration} =-\frac{\partial P V}{\partial Y}$$

Where:

• Key Rate Duration = Key Rate Duration for the chosen maturity point
• $\partial PV=$ Change in the present value of the security or portfolio due to a small change in the yield at the chosen maturity point $(\partial Y)$

Interpretation of Key Rate Duration

Key Rate Duration provides information on how the security or portfolio will react to yield curve movements at the selected maturity point. A higher Key Rate Duration implies greater sensitivity to changes in interest rates at that specific maturity, while a lower Key Rate Duration suggests less sensitivity.