Abstract
This chapter reviews alternative measures of interest rate and credit risk sensitivity. Fisher and Weil (1971) extend modified duration by allowing a nonflat term structure. Fisher and Weil duration makes unreasonable assumptions regarding the behavior of interest rate shifts because it is a one-factor model. Ho (1992) extends Fisher and Weil by allowing for more than one factor. While adding more factors increases complexity, it also increases flexibility to the point where one can capture any type of shift in the term structure—parallel, nonparallel, or even violent twists in the shape of the term structure. The major premise of Ho's key rate duration is that there are a few key influential interest rates that determine the shape of the yield curve—that is, if the yield curve were to change shape, the yield curve would pivot at one or more of these key rates and the intervening yields follow suit.
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