IRS Duration Calc.

CFA Level III
#1

Can someone explain how to calculate the duration of an interest rate swap? I understand that the duration of the floating rate is equal to half the time to the next reset. I am confused when calculating the fixed side. Do we always take 75% until the time to maturity? Wouldn’t the duration of a received fixed represent a long position in a fixed rate bond ? I would have thought the duration would have been the maturity?

Thanks!!

#2

The Macaulay duration of a coupon paying bond is less than the time to maturity, and the modified duration is less than or equal to the Macaulay duration; thus, the modified duration is less than the time to maturity. Using ¾ of the time to maturity is a simple approximation; it may be a good approximation for a given swap, or it may not be.