Hi,
I was wondering if we always have to multiply 0.75 to the maturity of a fixed-rate bond to calculate its duration.
For the item set on “Watanabe” from the CFA mock, the answer specifies to multiply 0.75 to the maturity to calculate the duration of the fixed-rate bond.
Since the question does not ask to apply 75% to the maturity, I thought it is always the case for all the fixed-rate bond.
Can anyone please confirm if I am right?
Thank you.
Yes; 0,75*maturity for fixed and 0,5*payment interval for floating bonds
Thank you, Kobi!
Also note that duration of fixed bonds is always more than duration of float, so if you’re paying fix it means you have int rate risk - > market value risk since higher duration means more sensitive to int rates.
anyone want to weigh in on this? i know some exam questions do it but i can’t find anywhere in the CFA text that says the duration of the fixed side of a swap is .75 of maturity.
volume 5 p. 450 does read “what would be the duration of the short position in a fixed rate bond? …let us assume this duration is about 0.75 or 75% of the maturity, an assumption we shall make from here out”
that doesn’t sound like they’re saying we should use .75, it’s just an assmption they’re making for that example…
Is it paying floating higher cash flow risk? Pay fixed higher market value risk?
From what I understand, swapping fixed for float payments (float cancel out, fixed is left) expose you to market value risk; and swapping float for fixed (fixed cancel out, float is left) will expose to cash flow risk.
makes sense for float pay = cash flow risk cause you are paying based on libor so if int increases instead of a decrease, you would need to pay more…
Yes, I thought it was an assumption for that example only too. But seems like not or i don’t know anymore