R28 EOC Q23 Duration of a swap (floating rate side)

[Blackou]

Hi,
The answer to Q23 states: To estimate the modified duration of the swap (MDURs), note that the swap’s floating-rate payments are semiannual payments, which implies an average duration of 0.25 years. So, given Lopez’s estimate of the duration of the swap’s fixed payments to be 75% of the swap maturity, the modified duration of the swap (MDURs) is -4.25 years, calculated as:
0.25 – (0.75 × 6) = –4.25 years
I agree that the average duration for the Floating Rate side is 0.25 .
But do not understand why , when computing the duration of a swap, one uses the average duration for the Floating Rate side of the Swap and not the maximum duration
At the begining of the swap, is not the duration for the Floating Rate side 0.5 ?
Are we not interested of the duration at the start of the swap?
Kinds Regards,
(I tried to look for similar topic such as http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91119907 but it was not clear)

 

[S2000magician]

There is no “average” duration or “maximum” duration.
We’re talking modified duration here: the sensitivity of the price to changes in the YTM.
As an approximation to the modified duration of the floating rate leg, we use half the time to the next coupon payment. It’s nothing more nor less than an approximation of the true modified duration.

 

[onlysimon]

i will just pick the answer which has duration less than the reset interval.
I’m not happy with “half the reset interval”, better just say somthing like “close to zero”

 

[S2000magician]

onlysimon wrote:I’m not happy with “half the reset interval” … .

Nor is anyone else, but CFA Institute commonly uses that as the modified duration of a floating-rate bond.

 

[Blackou]

Ok Thanks