The question:
Compute the duration of a four year pay-floating, receive fixed swap with quaterly payments. Duration of a fixed rate bond is 75% of maturity.
Answer : 75%*4-.125 = 2.875
What is the -.125??
Thanks!!
it’s a quarterly pay swap. the Duration a of floating swap payment is the amount of time between reset dates. In this case, 0.25. Covention is to use half the duration of the floating rate duration. Since it’s an outflow, you subtract it.
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