Hi, Why do they use the average duration instead of the actual duration for floating rate bonds? On the topic of ‘Risk management applications of swaps’ , the CFAI book says the duration of a floating rate bond paying quarterly interest is the average of 0.25 and 0, i.e 0.125 years. I am confused with this approach, as in calculating the duration of a fixed coupon bond we do not use an average duration. We use the duration of the bond at that instant. Thanks, MG.
I haven’t gotten that far but I assume because they are floating rate bonds, they have different durations based on when the intereset rate resets. Every time the interest rate resets, the bond has a different duration for that period of time until the next resetting date.
The duration at a reset date would be zero, but if rates moved right after a reset date it could be as large as 0.25 (for a quarterly bond). Since rates should be unbiased they are taking the average.
I concur with mwvt9. Duration for floating rate bond is .25 (quarterly reset bond) because after every quarter the PV of the principal amount/face value on the bond is back to 100. in a fixed rate rate bond the PV of the principal amount / face value could vary from 100 widely depending on how much interest rates moved from the issue rate. Hope this makes sense. Cheers 
Thanks guys.