# Key Rate Duration

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## Definition of 'Key Rate Duration'

Key rate duration is a measure of the sensitivity of a bond's price to changes in the benchmark interest rate. It is calculated by taking the weighted average of the time to maturity of the bond's cash flows, with the weights being the present value of the cash flows.

Key rate duration is important because it can help investors understand how their bond portfolios will perform if interest rates change. For example, a bond with a long key rate duration will be more sensitive to interest rate changes than a bond with a short key rate duration. This means that if interest rates rise, the price of the bond with the long key rate duration will fall more than the price of the bond with the short key rate duration.

Key rate duration can also be used to compare the relative interest rate risk of different bonds. For example, a bond with a higher key rate duration will have more interest rate risk than a bond with a lower key rate duration. This means that the bond with the higher key rate duration is more likely to lose value if interest rates rise.

Key rate duration is a useful tool for investors who want to understand the interest rate risk of their bond portfolios. By understanding key rate duration, investors can make more informed decisions about which bonds to buy and sell.

Here are some additional points about key rate duration:

* Key rate duration is not the same as Macaulay duration. Macaulay duration is a measure of the sensitivity of a bond's price to changes in its yield to maturity. Key rate duration is a measure of the sensitivity of a bond's price to changes in the benchmark interest rate.

* Key rate duration is often used to calculate the interest rate sensitivity of a bond portfolio. The interest rate sensitivity of a bond portfolio is the percentage change in the value of the portfolio for a given change in the benchmark interest rate.

* Key rate duration can also be used to calculate the duration gap of a bond portfolio. The duration gap is the difference between the weighted average maturity of the bonds in the portfolio and the duration of the benchmark interest rate. The duration gap can be used to measure the interest rate risk of a bond portfolio.

Key rate duration is a valuable tool for investors who want to understand the interest rate risk of their bond portfolios. By understanding key rate duration, investors can make more informed decisions about which bonds to buy and sell.

Key rate duration is important because it can help investors understand how their bond portfolios will perform if interest rates change. For example, a bond with a long key rate duration will be more sensitive to interest rate changes than a bond with a short key rate duration. This means that if interest rates rise, the price of the bond with the long key rate duration will fall more than the price of the bond with the short key rate duration.

Key rate duration can also be used to compare the relative interest rate risk of different bonds. For example, a bond with a higher key rate duration will have more interest rate risk than a bond with a lower key rate duration. This means that the bond with the higher key rate duration is more likely to lose value if interest rates rise.

Key rate duration is a useful tool for investors who want to understand the interest rate risk of their bond portfolios. By understanding key rate duration, investors can make more informed decisions about which bonds to buy and sell.

Here are some additional points about key rate duration:

* Key rate duration is not the same as Macaulay duration. Macaulay duration is a measure of the sensitivity of a bond's price to changes in its yield to maturity. Key rate duration is a measure of the sensitivity of a bond's price to changes in the benchmark interest rate.

* Key rate duration is often used to calculate the interest rate sensitivity of a bond portfolio. The interest rate sensitivity of a bond portfolio is the percentage change in the value of the portfolio for a given change in the benchmark interest rate.

* Key rate duration can also be used to calculate the duration gap of a bond portfolio. The duration gap is the difference between the weighted average maturity of the bonds in the portfolio and the duration of the benchmark interest rate. The duration gap can be used to measure the interest rate risk of a bond portfolio.

Key rate duration is a valuable tool for investors who want to understand the interest rate risk of their bond portfolios. By understanding key rate duration, investors can make more informed decisions about which bonds to buy and sell.

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Copyright © 2004-2023, MyPivots. All rights reserved.