I was doing the practise on 2014 morning, question 9b.
based on the answer, it said:
longer duration and higher frequency payment bond has higher duration.
So longer maturity make sense to me, but isn’t higher payment frequency has lower duration?
please help.
cheers
The more frequent the payment, the lower the duration, all else being equal.
If you’re a fixed rate payer floating rate receiver, and frequency is high then you will have an overall lower duration (negative duration)
That’s what I thought too. But the answer said longer maturity and higher frequency has higher negative duration lol
Elaborate on what? They told you what you initially thought, go back to the question, you either misunderstood, or it’s plain wrong.
I edited my previous comment
If you’re a fixed-rate payer, floating rate receiver, then you’re short duration; as you say, your duration is negative.
If you pay quarterly, you are short _ less _ duration than if you pay semiannually or annually.
OP’s claim (from what he’d read from some stupid source) is that the more frequently you pay, the _ more _ duration you’d be short. That’s utterly wrong.
It probably means a higher duration gap (net duration)
Without seeing the original source, I have no idea what they probably meant.
I’m disinclined to give them the benefit of the doubt. There’s lots of stupid stuff written about finance.
higher negative duration (more negative duration) = lower duration?
the formula looks like this
Duration of swap = (0.5 x payment frequency) - Fixed rate duration X (0.75)
so payment frequency is more often the (0.5 x frequency) ends up being lower which will mean a high negative duration
i understand your analogy of shorting duration. So if I am shorting less duration, at the same time I am longing less duration. So overall it’s the same?
is that the formula they used in the text? Lol
assuming that the fixed rate duration is 75% of its maturity, yes
Fixed