Assume that you manage $100mm bond port with duration of 1.5 years. You wish to increase the duration of the bond port to 3.5 years by using a swap. Assume the duration of a fixed rate bond is 75 percent of its maturity.
B - Would you prefer a 4 year swap with quarterly payments or a 3 year swap with semi annual payments?
Answer: 4 years swap duration = .75*4-0.125. Where are they getting the 0.125 from? How are they calculating it? I understand it’s the duration of the liability but i do not know how they are calcing it.