How do we calculate the duration for the Floating Rate side of a swap?
Is it just simply the time to maturity divided by 2? For example Quarterly payments = 0.25/2 = 0.125 Semi payments = 0.50/2 = 0.25 Thanks.
The duration of the floating rate side is only influenced by the next payment, because this is the only cash flow that is already fixed. The next payment can be looked at as a zero coupon bond, whose duration is just it’s maturity. So, the duration of the floating side is the time remaining until the next payment. ON AVERAGE the duration will be the time between payments, divided by 2. That’s what’s in the curriculum. Schweser has a weird take on this (plain wrong if you ask me): They first state that the duration of a zero coupon bond is its maturity (ok), and that consequently the duration of a floating rate bond is the time to next payment divided by 2 (completely wrong). Do you guys agree?
More precisely, Schweser neglects to say that the AVERAGE duration is the time to next payment divided by 2. Which makes the statement wrong and you can’t follow the logic.