Key Rate Duration analysis for FIS Portfolio

[John267]

Hi David

Can you please explain how to analyze FIS portfolio consists of more than 500 bonds using Key Rate Duration concept?

 

[Matthew Graves]

You might need to be a bit more specific. What do you mean by "how to analyze"? Do you mean how to use the KRDs or do you mean how to obtain them?

 

[John267]

You are correct. What I asked is not clear. My requirement is to prepare an excel worksheet for 900plus bond portfolio. Then change each or few key rates according to Treasury Zero rate curve monthly change and see how that key rate shift effects the entire portfolios price change. It can be based on my own key rate shift assumptions not necessarily based on Treasury zero rate curve parallel shifts.

 

[Matthew Graves]

Ok, that's clearer now.

Case #1: Simplest Case

Assumption #1:
You already have the KRDs for each bond.

Assumption #2:
All bonds are priced off the same curve.

You can simply use the market value weighted average KRDs for the portfolio as a whole to calculate the value change. Simply apply your rate shift to each KRD to get overall portfolio value change.

Case #2: Multiple Curves

Assumption #1:
You already have the KRDs for each bond.

Assumption #2:
Bonds are priced off different curves.

Same as for Case #1 but treat bonds mapped to different curves separately and sum up the value changes to get the portfolio value change.

 

[John267]

Please explain how to calculate market value weighted average KRD for the portfolio

 

[Matthew Graves]

For a portfolio of n bonds, for each KRD tenor, t, you calculate the portfolio market value weighted average simply as:

where the weight, w, for each security, i, is its current dirty market value divided by the total portfolio market value.