Key Rate Duration

Which of the following statements _least likely_ describes key rate duration?

Incorrect. Key rate duration can be used to measure the sensitivity of bond prices to changes in the yield curve even when the shift in the yield curve is not parallel—for example, if the short-term rates increase faster than the long-term rates. Essentially, key rate duration captures the shaping risk of a bond.

Incorrect. This statement applies to key rate duration. There is a rate duration for each point of the yield curve. Thus, key rate duration is not necessarily a single number but a vector of different rate durations.

Correct! The modified duration and the key rate duration calculate the sensitivity of bond prices to changes in different factors. The modified duration measures the sensitivity to a bond's own yield-to-maturity, and the key rate duration measures the sensitivity to the yield curve. Thus, these two measures cannot be equivalent under any circumstances.

Key rate duration is equivalent to the modified duration of a bond when there is a parallel shift in the yield curve

There are key rate durations for every point on the yield curve indicating that there are different key rate durations for every maturity on the yield curve

Key rate duration provides analysts a tool to analyze the sensitivity of a bond where the short-term benchmark rates increase at a faster rate than the long-term rates