Hi,

2014 CFA exam itself, Question 9 B ,should we always assume fixed rate duration to be 75% of the maturity…What’s the rule for the fixed rate duration if no abolute number given?

Hi,

2014 CFA exam itself, Question 9 B ,should we always assume fixed rate duration to be 75% of the maturity…What’s the rule for the fixed rate duration if no abolute number given?

Duration for the fixed side will be given to you, it is usually 75% of the maturity although not always the case. This is a simplifying assumption, as we know that duration of a fixed rate bond is driven by many factors (e.g maturity, coupon, yield etc), as such it is not equal to a fixed percentage of the term to maturity.

Duration for the floating side is calculated as ½ of the reset period, which you are expected to know by heart. The reason being that at initiation, the swap’s duration is equal to the reset period (e.g. 6 months), one day before the reset day the swap duration is approaching zero, then on the following day, the floater will reset and trade at par when the duration is equal to the reset period again. So using a straight line estimation, (reset period + 0) / 2 gives you the duration of the floating leg