From Schweser: What is the duration of a floating rate bond that has six years remaining to maturity and has semi-annual coupon payments. Assume a flat-term structure of 6%. Which of the following is closest to the correct duration? A) 4.850. B) 0.500. C) 6.000. D) 12.000. The correct answer was B) 0.500. The duration of a floating rate bond is equal to the time until the next coupon payment takes place. As the coupon rate changes semi-annually with the level of the interest rate, a floating rate bond has the same duration as a pure discount bond with time to maturity equal to the time to the next coupon payment of the floating rate bond. Can anyone explain this more simply? I don’t think I’ve seen Schweser before label a floating rate bond’s duration as “the time until the next coupon payment takes place.” Thanks!
Well floating rate bonds will have a duration up until the next coupon date, as the rate will be adjusted to reflect market rates, which should bring price to par and technically eliminate the interest rate risk (i.e. duration). In the question it asks with respect to a tenor of 6 years, semi-annual payments. Therefore, duration would be total years to maturity divided by number of payments (i.e. 6/12) which equals 0.5. Thats just an approximation.