Lesson 4 of 5 · All lessons in this module
Lesson 4 of 5 · 14 min
Key rate duration and yield curve shape risk
Key rate durations split effective duration across points of the benchmark curve, so you can estimate how a bond or portfolio reacts when the curve steepens, flattens or twists rather than shifting in parallel.
In short
- Key rate duration (or partial duration): sensitivity of a bond's price to a change in the benchmark yield at one maturity, other key rates unchanged.
- KeyRateDur_k = −(1/PV) × (ΔPV/Δr_k). Computed like effective duration, but only one key rate is shifted (typically ±1 bp).
- The key rate durations sum to effective duration.
- They reveal shaping risk: exposure to changes in the curve's shape (steepening, flattening, twisting).
- %ΔPV ≈ −KeyRateDur_k × Δr_k for each key rate; add the pieces for a multi-point move.
- Managers tilt key rate durations versus an index to act on views about the curve's shape.
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