Duration of Inverse floater

balajismz
Finance Junkie
Posts: 63
Joined: Mon Nov 05, 2012 9:13 am

Duration of Inverse floater

Postby balajismz » Fri Nov 09, 2012 10:36 pm

Suppose that the coupon and the modified duration of a 10 year bond priced to par is 6% and 7.5% respectively. What is the approximate modified duration of a 10 year inverse floater priced to par with a coupon of 18%-2*LIBOR (1 month)?
A. 7.5
B. 15.0
C. 22.5 Ans
D. 0.0

Can someone try this??

Balaji

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swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: Duration of Inverse floater

Postby swarnendupathak » Fri Nov 09, 2012 11:50 pm

Hi balaji,
We can structure the Inverse Floater of 18%-2*LIBOR into 3 fixed rate bond of 6% each & short two floater bond linked with LIBOR. Then the duration of fixed rate bond would be 7.5*3 = 22.5 less duration of two folater i.e. 2*1/12 = 0.166.
So, net duration would be 22.33. The closest answer is option C.

Swarnendu

balajismz
Finance Junkie
Posts: 63
Joined: Mon Nov 05, 2012 9:13 am

Re: Duration of Inverse floater

Postby balajismz » Sat Nov 10, 2012 9:41 am

Thank you so much but I reckon duration of floater should not be taken in the same way as a fixed rate bond

Balaji


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