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FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01

A bond portfolio has key rate durations of 0.5 at 2 years, 1.2 at 5 years, 3.1 at 10 years and 2.4 at 30 years. Only the 10-year par yield rises, by 20 basis points, while all other key rates stay unchanged. What is the approximate percentage change in portfolio value?

The portfolio falls by about 0.62%. With only the 10-year key rate shifting, the relevant exposure is the 10-year key rate duration of 3.1, so the change is -3.1 x 0.20% = -0.62%. The total duration of 7.2 would apply only to a parallel shift.

  1. A-1.44%
  2. B-0.62%Correct
  3. C-0.48%
  4. D-0.062%

Explanation

Only the 10-year key rate moves, so change = -3.1 x 0.0020 = -0.62%. The -1.44% applies the total duration of 7.2 (a parallel shift of 20bp). The -0.48% uses the 30-year key rate duration of 2.4. The -0.062% is a decimal-place error.

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