Partial Duration
Partial duration is a generalized term for any duration measure that captures price sensitivity to a yield change at a specific segment or point on the yield curve, of which key rate duration is the most widely used form, enabling disaggregated analysis of a portfolio's exposure to non-parallel yield curve movements.
Duration in its most general sense measures the price sensitivity of a fixed income instrument to changes in interest rates. Standard duration measures — Macaulay, modified, effective — aggregate this sensitivity into a single number by assuming a uniform parallel shift in rates. Partial duration breaks this aggregate into components corresponding to different curve segments or maturity buckets, providing a more granular risk profile.
The terminology between partial duration and key rate duration is sometimes used interchangeably in industry practice, though technically they can differ in implementation details. Key rate duration (KRD) typically uses a specific set of benchmark maturity points — matching Treasury on-the-run maturities — while partial duration may refer more generally to any segmented duration framework, including methodologies that use principal component analysis (PCA) to decompose yield curve movements into orthogonal factors before computing sensitivities.
For a plain-vanilla coupon-bearing bond, the partial duration contribution of each coupon payment can be computed analytically. The partial duration at maturity bucket k is the present value of all cash flows maturing in bucket k, weighted by their time to payment, divided by the total bond price. Summing partial durations across all buckets recovers the full modified duration.
Partial durations are essential for structured products and mortgage-backed securities, where cash flows are distributed across many maturities simultaneously and the distribution changes with the interest rate environment. A mortgage pass-through security, for example, has partial duration contributions spread across 1 to 30 years, with the distribution shifting as prepayment speeds change in response to rate movements.
Portfolio managers use partial durations to construct immunization strategies, particularly for liability-driven mandates. Immunizing against all possible yield curve shapes — not just parallel shifts — requires matching the partial duration profile of assets to liabilities across every maturity bucket. Duration-matched but partial-duration-mismatched portfolios remain exposed to basis risk from non-parallel yield curve movements, which can be significant over multi-year holding periods.