Curve-Based and Empirical Fixed-Income Risk Measures

Having covered yield-based duration and convexity measures, we now introduce curve-based measures of a bond’s price sensitivity to changes in a benchmark yield curve and when cash flows are uncertain. We show how the change in a bond’s full price is estimated by combining curve-based duration and convexity sensitivity mea- sures, discuss uses of these approximate measures by issuers and investors, and explain their benefits and limitations. We also introduce key rate duration as a measure of interest rate risk across the term structure. Finally, we show that benchmark yield changes and credit spreads for issuers of lower credit quality are negatively correlated, especially during periods of market distress, establishing the benefit of an empirical versus analytical approach.