To increase duration you want to receive Fixed and pay floating

[patso]

To increase duration you want to receive Fixed and pay floating. The opposite is true re reducing duration.
Whats the intuition here. How does investing in a Fixed rate bond help increase duration??

 

[Influence]

Wait a minute, “receive fixed” means you invested in a fixed-rate bond (so you are receiving fixed coupons), and that position helps increase duration - your last sentence says the opposite. By the same logic, pay floating means you took a short position in a variable-rate bond: you sold the bond and are now paying the floating coupon payments.
Maybe this answers your question, but to get more “intuition”, you need two interpretations of duration.
The duration of a fixed-rate bond can be viewed a weighted-average of the timing of its fixed cash flows (for example, a 10-year zero coupon bond has a duration of 10 years and a 5-year 7% coupon bond has a duration of closer to 4 years, as the timing of the coupons bring that average down).
For a variable-rate bond (a floater), think of the duration as the sensitivity of the bond’s price to changes in the level of interest rates. Because the cash flows of a floater will adjust to changes in interest rate, such changes will actually not have much impact on the bond’s price (as in the numerator - cash flows - and denominator - discount factor - of each term in the price formula will move in tandem).

 

[S2000magician]

patso wrote:To increase duration you want to receive Fixed and pay floating. The opposite is true re reducing duration.
Whats the intuition here. How does investing in a Fixed rate bond help reduce duration??

It sounds as though you’re misinterpreting this.
When you receive fixed, that means that you’re investing in a fixed rate bond: it increases your duration: you’re positive duration.
When you pay fixed, you’re negative duration : it reduces your duration.
Floating rate bonds have close to zero duration, so paying or receiving floating has little effect on your duration.

 

[patso]

Influence wrote:
Wait a minute, “receive fixed” means you invested in a fixed-rate bond (so you are receiving fixed coupons), and that position helps increase duration - your last sentence says the opposite. By the same logic, pay floating means you took a short position in a variable-rate bond: you sold the bond and are now paying the floating coupon payments.
Maybe this answers your question, but to get more “intuition”, you need two interpretations of duration.
The duration of a fixed-rate bond can be viewed a weighted-average of the timing of its fixed cash flows (for example, a 10-year zero coupon bond has a duration of 10 years and a 5-year 7% coupon bond has a duration of closer to 4 years, as the timing of the coupons bring that average down).
For a variable-rate bond (a floater), think of the duration as the sensitivity of the bond’s price to changes in the level of interest rates. Because the cash flows of a floater will adjust to changes in interest rate, such changes will actually not have much impact on the bond’s price (as in the numerator - cash flows - and denominator - discount factor - of each term in the price formula will move in tandem).

Thanks mate. Perfect explanation.