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Key Rate '01

Akriti1

New Member
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Hi, Can you please help me with the solution to this question. By applying key rate'01 formula, I marked the answer as b but it revealed that the correct answer is d. I want to understand why is it not option b.
 

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David Harper CFA FRM

David Harper CFA FRM
Staff member
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Hi @Akriti1 The KR01 is analogous to the DV01: it is the price change associated with a plus one-basis point (0.01%) shift in the key rate. In this question, the 5-year shift shows a price of $92,007 which is $7.00 above the initial price, so that is the key rate. Two points:

1. if you refer to Tuckman's 5.2, please notice that 1/10,000 * 1/0.01% = 1/10,000 * 10,000 = 1. The ∂P/∂y(k) is a slope and is much too large by 10,000. See my note here for further details https://www.bionicturtle.com/forum/threads/week-in-financial-education-2021-05-24.23840/post-88846

2. It is not my best question, frankly. I wouldn't write a question like this today because it's just testing scales. It would be understandable to think that $7.00 / 100 = $0.07 is the answer (which is not given) because the KR01 can be "per 100 face value" like the DV01. But I don't see the logic for choice B. Even if you divided by 10,000, you get 7/10,000 = 0.0007 which is not an answer. Hope that's helpful,
 
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