- Thread starter girishkhare
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Hello David

could you fix links of this post?

could you fix links of this post?

HI Girish,

This fascinated me, also, as I was preparing for Saturday's webinar b/c we reviewed an interest rate swap pricing problem (see #3 at http://www.bionicturtle.com/forum/viewreply/6344/)

… and my sub-question included: what is the swap's duration.

Where I tried to be careful to say "in practice, we round down the duration of the FRN to zero" (i.e., the IRS = long a fixed plus short a FRM)

Starting with your final point: my preferred way of saying Macaulay duration, that I got from Sanjay Nawalkha @ http://www.fixedincomerisk.com/ is "w,eighted average maturity of bond, where weights are PV of cash flows." In which case, the FRN has Mac duration ~ time to next coupon because all of the subsequent cash flows have a weight of zero (as they do not contribute to price). So this is closely related to the idea that a FRN must price at par immediately upon coupon settlement. Some further discussion on this phenomenon and a very brief XLS "proof" here

So, FRN prices at par at the moment of settlement, such that FRN duration approximately (~=) time to next coupon. In the webinar, I said "round down to zero" b/c an FRM question (for example) would typically assume FRN duration = 0, but unless it is immediately before settlement that is strictly incorrect (although my example shows how minimal the error is).

So, I disagree, technically, with "the duration of the Floating Rate Note immediately after the rate adjust is zero" because at that point in time, the next coupon is essentially fixed as the rate has already been determined -- zero duration cannot be true as there is a bit of price risk until the next reset. (it is just a wrong as saying a six month zero fixed coupon bond has 0 duration). The Mac duration is nearer to 0.4xx years (< 0.5 years).

... but this is why I was worried about presenting it: in my example, the FRN duration is nearer to 0.5 but i "rounded down" to zero (and the impact on swap DV01 was only $2).

hope that helps, David

This fascinated me, also, as I was preparing for Saturday's webinar b/c we reviewed an interest rate swap pricing problem (see #3 at http://www.bionicturtle.com/forum/viewreply/6344/)

… and my sub-question included: what is the swap's duration.

Where I tried to be careful to say "in practice, we round down the duration of the FRN to zero" (i.e., the IRS = long a fixed plus short a FRM)

Starting with your final point: my preferred way of saying Macaulay duration, that I got from Sanjay Nawalkha @ http://www.fixedincomerisk.com/ is "w,eighted average maturity of bond, where weights are PV of cash flows." In which case, the FRN has Mac duration ~ time to next coupon because all of the subsequent cash flows have a weight of zero (as they do not contribute to price). So this is closely related to the idea that a FRN must price at par immediately upon coupon settlement. Some further discussion on this phenomenon and a very brief XLS "proof" here

So, FRN prices at par at the moment of settlement, such that FRN duration approximately (~=) time to next coupon. In the webinar, I said "round down to zero" b/c an FRM question (for example) would typically assume FRN duration = 0, but unless it is immediately before settlement that is strictly incorrect (although my example shows how minimal the error is).

So, I disagree, technically, with "the duration of the Floating Rate Note immediately after the rate adjust is zero" because at that point in time, the next coupon is essentially fixed as the rate has already been determined -- zero duration cannot be true as there is a bit of price risk until the next reset. (it is just a wrong as saying a six month zero fixed coupon bond has 0 duration). The Mac duration is nearer to 0.4xx years (< 0.5 years).

... but this is why I was worried about presenting it: in my example, the FRN duration is nearer to 0.5 but i "rounded down" to zero (and the impact on swap DV01 was only $2).

hope that helps, David

Last edited:

Hello David

could you fix links of this post?

could you fix links of this post?

That post was from 2010 and our website and forum have been updated since then so I'm not sure if we can find the posts that were being referenced. @David Harper CFA FRM might have an idea of which posts he was referring to, but when posts are that old, it is difficult to find the link that was being referenced....if the link still exists. A search in the forum for the keywords might be helpful, but unfortunately, I don't have a lot of time to spend on searching the forum for posts from 2010. If I happen to find the links that are referenced, I will update here.

Thank you,

Nicole

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