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CFA Level I · CFA Level I Exam · Interest Rate Risk and Return

Key rate durations of a portfolio are measured at 2-, 10- and 30-year maturities. The portfolio's key rate durations are 0.5, 1.0 and 4.5, respectively. The yield curve most likely creates the greatest loss for this portfolio if it:

A rise in 30-year yields only, which steepens the curve, causes the greatest loss. The portfolio's largest key rate duration is 4.5 at 30 years, so it is most sensitive there, while the other two scenarios involve falling yields that increase portfolio value.

  1. Asteepens through a rise in 30-year yields onlyCorrect
  2. Bshifts down in parallel by 25 bps
  3. Cfalls at the 2-year point only

Explanation

The 30-year key rate duration of 4.5 is the largest, so a rise in long-term yields causes the largest price decline. A parallel fall in yields raises prices, and a fall at the 2-year point raises prices slightly, as key rate duration is only 0.5.

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