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Floating rate bonds and little duration.

Hello all

can someone help me understand why floating rate bonds have little duration? 

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Floating-rate bonds have very low effective duration; not modified duration, and not Macaulay duration.

Recall from Level I that when a bond’s coupon rate is the same as its YTM, it sells at par.  Because a floating-rate bond’s coupon rate resets to market interest rates, its price is always extremely close to par.  (It may vary a little between coupon payment dates, but not much.)  Very little price change means very short effective duration.

Simplify the complicated side; don't complify the simplicated side.

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Crystal clear. Thanks Bill. 

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

but how do you calculate  the modified duration, and Macaulay duration of floating rate bonds? 

Daniel Valdivia R. , Risk Market Analyst

ecodanielv wrote:
but how do you calculate  the modified duration, and Macaulay duration of floating rate bonds?

Macaulay and modified duration assume that the cash flows don’t change, so you could assume that the bond is a fixed-rate bond with the current coupon rate.  I suppose that you could also create a binomial interest rate tree and use that to get the estimated cash flows, then use the formula for Macaulay duration as the present-value-weighted time to receipt of cash flows.

In any case, whatever the calculation, you’re going to come up with useless numbers, because the assumption that the cash flows don’t change is false.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Thats super helpful