Aug 16

Key rate shift technique – revised spreadsheet

by David Harper, CFA, FRM, CIPM

FRM |

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As the key rate shift technique spreadsheet is popular (or maybe it’s that Tuckman Chapter 9 is challenging), I uploaded a revised version to the member page. I tried to improve the organization and color code the impact of the key rate shifts.

Following Tuckman, we assume a 30-year fully amortizing mortgage bond and an flat 5% yield curve (input assumptions in yellow).

key_rate_thmb

Then we choose the key rates and the decision rule concerning “neighboring rates.” In this case, four key rates and linear interpolation. The key rate shift technique becomes a matter of re-pricing the bond by shocking the key rates:

  • Shock the 2 year rate by plus one basis point (1 bps). This includes shocking its neighboring rates from zero to 5 years.
  • Shock the 5 year rate by plus one basis point (1 bps). Neighbors from 2 to 10 years.
  • Shock the 10 year rate by plus one basis point (1 bps). Neighbors from 5 to 30 years.
  • Shock the 30 year rate by plus one basis point (1 bps). Neighbors up to 30 years.

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