Fixed vs. Floating Duration

CFA Level III
#1

Why does having Fixed cash flows have a higher duration than Floating ?

#2

Floating duration is based upon the tenor of the floating leg…eg 3 m libor duration is 0.25

#3

duration is the sensitvity to the price…if you held 2 instruments one whose cashflows are fixed and another whose cashflows float as according to the interest environment off the top of your head which would you say is more sensitive? also Bton is correct the duration of the floating portion is the average ( 1/2) of the time to the next coupon reset…i.e quarterly floating bonf has a duration of 0.125

#4

because floating rates reset often, thus they have a shorter duration

#5

There is some kind of flaw in this argument , that I can’t pinpoint. Are rates going to zero after the swap reset . Won’t the floating rate reset to some reasonable rate after the reset? The calculation pretends that the floater has no obligation after the reset.

#6

Makes sense, thanks dudes.

#7

So which has a higher duration…Pay fixed/receive floating or…Receive Fixed/pay floating?

#8

Duration measures the linear interest rate sensitivity of interest rate sensitive instruments. For floating rate instruments, as you are not locked in fixed interest rate, your interest rate risk is limited only to next coupon reset date, so is duration.

#9

cfalover Wrote: ------------------------------------------------------- > So which has a higher duration…Pay > fixed/receive floating or…Receive Fixed/pay > floating? u tell me mr lover lover …in the first ur short duration …you gave away the larger duration to receive the smaller duration… vice versa for the second

#10

Thanks. I love CFA.