Explanation:
The Key Rate '01 is defined as the change in the portfolio value for a 1 basis point shift in the key rate, generally computed as the Initial Value minus the Value after Shift. Using the provided data for the shifts: For the 2-year shift: KR01 = 900.525 - 898.950 = 1.5750. For the 30-year shift: -0.5980 = 900.525 - Value after 30-year shift. Solving for the Value: Value = 900.525 - (-0.5980) = 901.123.
Key Rate Duration (KRD) is computed using the formula: KRD = KR01 / (Portfolio Value × 0.0001) KRD = -0.5980 / (900.525 × 0.0001) = -6.64057 ≈ -6.641.
Ultimate access to all questions.
No comments yet.
Q.75 A risk manager prepares a presentation on the interest rate risk of the bank’s bond portfolio. The table below shows the value of the portfolio in cases of key rate shifts and corresponding key rate '01s.
| Value | Key Rate '01 | |
|---|---|---|
| Initial Curve | 900.525 | |
| 2-year Shift | 898.950 | 1.5750 |
| 5-year Shift | 900.302 | 0.2230 |
| 10-year Shift | 889.112 | 11.4130 |
| 30-year Shift | ? | −0.5980 |
| Total | 12.613 |
What are the portfolio’s value and key rate duration for a 30-year shift?
A
Portfolio’s value = 901.123; Key rate duration = −6.641
B
Portfolio’s value = 899.927; Key rate duration = −6.641
C
Portfolio’s value = 899.927; Key rate duration = 135.090
D
Portfolio’s value = 899.927; Key rate duration = −9.119