Thanks for the responses! I’m a little confused though. I think this was probably covered in LI, but what is the stream of cash flows like? Consider a two year swap with semi-annual payments and a notional principal of $100 million starting on 1/1/15, with the fixed rate paying 5% and the floating paying LIBOR. If on 1/1/15 the LIBOR was at 5.25% and on 6/30/15 the LIBOR was at 5.90%, would the net payment to the floating receiver be 0.25% or 0.90%? Basically, is the cash flow determined at the beginning of the period or the end of the period? If we knew on 1/1/15 that on 6/30 we would receive $250K (0.25% of $100MM) then it effectively becomes a zero coupon bond and it’s duration should be equal to its maturity (6 months), but if we don’t know what our payment will be on 1/1/15 and it is based on the LIBOR on the day of the first payment 6/30/15 ($900K), then I don’t see how there can be any duration at all because there would be no interest rate risk (on the floating side at least)….. So it seems like I’m confused on two different things; 1) Is the repricing date upfront or on the tailend(e.g. 1st payment based on LIBOR on 1/1/15 or 6/30/15) and 2) In either case how is the duration anything other than 0 or 6 months… I know I should just memorize the formula and move on but these types of things bother me until I figure them out.
Thanks for all your help!