Key Rate Duration is a measure used in fixed-income investing to evaluate how the price of a bond or bond portfolio changes in response to shifts in interest rates at specific maturity points along the yield curve. Unlike traditional duration measures such as Macaulay or modified duration, which assume a parallel shift in interest rates, key rate duration isolates the sensitivity of a bondís price to changes in individual maturities, such as the 2-year, 5-year, or 10-year yield.

In simple terms, Key Rate Duration (KRD) helps investors understand how different parts of the yield curve affect their bond holdings. For instance, a bond portfolio may be more sensitive to movements in the 10-year rate than the 2-year rate. By identifying which maturities have the greatest impact, portfolio managers can adjust their holdings to manage interest rate risk more effectively. This makes KRD a crucial tool for investors who deal with non-parallel yield curve shiftsócommon in real-world scenarios influenced by economic policy changes, inflation data, or central bank actions.

The calculation of Key Rate Duration involves changing one key interest rate at a time while keeping others constant and observing the resulting change in bond price. The outcome indicates the price sensitivity at that particular maturity point. Summing up the key rate durations across all maturities can approximate the total duration of the bond.

In practice, portfolio managers and risk analysts use KRD to hedge exposure to specific yield curve movements or to position their portfolios based on expectations of interest rate changes. By analyzing duration at various key rates, investors can construct better-diversified fixed-income portfolios that are resilient to unpredictable shifts in the interest rate environment.