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Duration of a bond is the sensitivity of an instrument's value to interest rate changes across the yield curve. It does not capture the impact of yield change at a particular point on the curve. Key rate duration (KRD) is the interest rate sensitivity of the bond's value to interest rate change at a particular point on the yield curve.
Mathematically, the sum of the key rate duration is equal to the duration of the bond. Eagle supports an extension of its Fixed Income Attribution model to support key rate duration decomposition so that the duration matched risk-free price return is decomposed into roll and a set of key rate durations effects.
To quantify the yield curve sensitivity of each bond in a portfolio, you can define a series of key rate durations relative to specific yield curve points. The key rate duration is the percentage price response per 100 basis point movement in a particular risk-free rate ─ while the rest of the yield curve remains constant. By defining many points along the yield curve, key rate durations provide an accurate representation of the sensitivity of each bond in a portfolio to changes of the yield curve.
Key rate durations can play a key role in portfolio management by quantifying the exposure of a portfolio to each section of the yield curve. Using these measures, portfolio managers who deliberately want to express a view about yield curve reshaping structure their portfolio to have different key rate duration exposures from those of their benchmark. Alternatively, investors who want to immunize their portfolios to yield curve reshaping structure a portfolio with the same key rate duration exposures as their benchmark.
To calculate each of the key rate duration returns, you multiply the observed yield change at each of the key rate duration points by -1 times the key rate duration of that point. The following table lists the return for key rate durationi.
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You can have as many key rate durations as you like. The default number is 10. Performance System Parameter 11 allows you to edit the default number.
To edit the default number of key rate durations:
- From any Eagle window, click the Eagle Navigator button to access the Eagle Navigator.
- Enter System in the Start Search text box and click the System Parameter (Performance Center) link.
You see the Performance Center and the Performance System Parameters workspace.
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- Select Sys Item 11, Maximum number of Key Rate Duration points for Fixed Income Attribution, right click and select Edit.
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