Key rate shift: technique

The key rate shift technique amounts to: Pick several key rates; e.g., 2, 5 10 and 30 year; Make a rule about treating neighbor rates; e.g., linear interpolation; Re-price the bond based on shocking only the key rate (plus its neighbors) but leave the rest of the curve alone. This is the essence of key rates: instead of assumes a parallel shift in the yield curve (duration is the single factor that treats the entire yield curve), we shock/shift selected key rates.

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