Schweser Vol 2 Exam 2: #21.1: Schweser explains: “The duration of the 4-year floating rate bond would be one-half of the payment interval, or 0.5 × 1/4 = 0.125.” While I think that duration should NOT be adjusted by one-half. It should be just be 1/4 = 0.25. Even my swap calculator agrees with me. But since I am to learn it the CFA way, is there somewhere in CFA curriculum it says that duration of float leg should be one-half the interval?
I copied my personal notes right out of Schweser and I have that written down as a semi annual pay duration is 0.5. I thought I had seen a couple times where they contradicted themselves on this. I will have to look into my CFAI books to get an answer on that I guess.
Yes I would think so too. Semi-annual float duration = 0.5 and quarterly = 0.25. thanks
According to CFAI Volume 5 pg 266 it is one half the pay structure. So if it’s quarterly pay, duration = .125 If it’s semi-annual duration = .25 So I assume we should go with this unless provided on the exam. I just found it in Schweser where it says quaterly is .25 and semi annual is .50. The other issue I have is you can have a swap that is reset quarterly, but pays semi annually. I do these all the time. So is the floating leg duration calculated off the reset, or the payment???
no its stated somewhere that yu shuld take 50% for the floating. iwill post the pages in CFA book later
Its .125 Avg Duration for Quaterly and 0.25 Avg Duration for SemiAnnual
Yup, I’m afraid it’s duration based on average time til next payment, so you halve it. Check out p.223, CFA book 5, last dozen or so lines. Thanks, I wouldn’t have spotted this otherwise.
(More specifically, last 6 lines)
Ok. Thanks guys. I’ll go with the CFA answer on the exam. I’d still argue that it shouldn’t be halved since your money is tied up for .25 fraction of the year and from a zero coupon perspective duration is 0.25. But I won’t argue that on the exam.
dinuda Wrote: ------------------------------------------------------- > Ok. Thanks guys. I’ll go with the CFA answer on > the exam. > > I’d still argue that it shouldn’t be halved since > your money is tied up for .25 fraction of the year > and from a zero coupon perspective duration is > 0.25. But I won’t argue that on the exam. Technically your conclusion is right and good for exam. Conceptually we take average of lowest and higest. Like for semiannual 0 would be lowest duration and highest would be 0.5 so average would be .25. This is how books have mentioned.
I suck at this area… really got to wrap my head around this concept… the whole Duration of the Floating-Pay Counterpart = Dfixed - Dfloat… I just don’t get it…
Dinuda doesn’t it depend on where we are in relation to the next payment? if payment is due tomorrow, duration can’t be 0.25 can it? I think CFAI just simplifies it to half the pay period to avoid confusion.
thats right. but all the swaps that we value in cfa are as if valuation date = effective date. but as your days pass by into a swap your duration decreases day by day, something that isn’t in cfa. swaps is all i do for living so i better know this stuff (or pretend that i know:))
Bringing up an old thread. This is now on page 453 in Example 2, I concur with previous posters, why would a floating rate bond have a duration of half the payment interval? I thought the duration would be roughly the payment interval. So quarterly floating payments would mean duration 0.25 not 0.125…
float is always = 1 / 2xq
fixed is 0,75 x number of years (fixed is always > float), more sensitive to int rate risk, higher market value risk (if you pay fix).
Q = 2 if semi annual, 4 if quarterly
if you pay float = higher cash flow risk.
works like a charm 
Works like a charm… …but where do you find the formula explained?
float is always = 1 / 2xq