Fixed Income: Key rate shift technique (FRM T4-43)

The key rate shift technique overcomes the key limitation of duration and DV01 which is that they must assume a parallel shift in the yield curve because they are single-factor risk measures. The key rate shift technique, on the other hand, is multi-factor: the term structure is carved into a limited number of "key rate regions;" in this illustration, four key rates are selected, 2-year, 5-year, 10-year, and 30-year.

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[rachnapriyanka]

Thank you, David! I am learning so much from your videos!

[prasadkamath]

nice video, where can I get the excel for this?

[janghyuk]

Hi David, since we have a positive key rate, 0.1133 for 30 year shift, does it means that as factor increase by 1 basis point, the dollar value increase by 0.1133? Why does the price decrease to 26.20152?

[citizenobserver]

Hi-So all other things remaining same the price of bond would increase if the yield increases by 1bps for 2/5/10 year key rate?
Also how to interpret the duration of -43 for 30 yr key rate?

[TheBartlord]

Hi David, thanks for the video, it's very clear. One question though: Since the bond only has one cash flow, that is, after 30 years, why do shifts earlier on in the curve result in a change in present value of the bond in the 2/5/10 year cases wrt the initial present value? A shift in the 30 year par yield leads to a different discount factor for the (only) cash flow, and thus in that scenario we indeed get a different present value, but if I understand it correctly, in the other cases we should find the same present value every time since we don't shock the par yields affecting the discount factor to be used for the cash flow. Hope that made sense. Thanks!

[qkameryun]

Hi, thanks for your excellent video. I am confused why there are positive KR01 and KR durations? I think as a bp increase, the bond price will always fall. Isn’t it?