Stress Test (Rate Shock)

Stress testing estimates how a bond or portfolio would perform under extreme but plausible scenarios — typically large parallel yield shifts (+/-100bp, +/-200bp). A simple stress uses duration: a 100bp yield rise with duration 6 implies ~6% price loss. But for large moves, you should include convexity for accuracy: ΔP/P ≈ −Dur×Δy + 0.5×Conv×(Δy²). Limitations: assumes parallel shifts (all maturities move equally), ignores spread changes, and can't capture options or embedded features. More sophisticated stress tests model non-parallel shifts (curve steepening/flattening), credit spread shocks, and historical stress scenarios (2008 crisis, 1994 bond selloff).