Key Rate Duration vs. Effective Duration - Quant Trader Interview Question
Difficulty: Hard
Category: Algorithms & Data Structures
Practice quant interview questions from top firms including Jane Street, Citadel, Two Sigma, DE Shaw, and other leading quantitative finance companies.
Topics: fixed-income, duration, risk-management, yield-curve
Problem Description
You are evaluating the interest rate risk of a bond portfolio. You need to understand the difference between key rate duration and effective duration. Consider a scenario where the yield curve experiences a non-parallel shift. Specifically, the 5-year point on the yield curve increases by 25 basis points while all other points remain unchanged. How does key rate duration specifically differ from effective duration in measuring the bond portfolio's sensitivity to this type of yield curve movement
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