medium · Debt Capital Markets pricing-yields-curve
How does 'Key Rate Duration' differ from 'Effective Duration' when analyzing a bond portfolio?
- Key rate duration measures sensitivity to a change in yield at a specific maturity point, whereas effective duration assumes a parallel curve shift.
- Key rate duration is always numerically higher than effective duration because it isolates a single maturity bucket on the yield curve.
- Key rate duration captures sensitivity to credit spread volatility, whereas effective duration is confined strictly to interest-rate movements.
- Effective duration applies only to callable and putable bonds carrying embedded options, while key rate duration is reserved for plain option-free bonds.
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