How to estimate Duration? 2010, following, contract, example

NakedPuts

Ok, I've been having trouble with estimating duration.

I know that for Swaps, you do 3/4 the maturity for the Fixed Rate and 1/2 the reset date on the variable.

What about for other types of instruments? Take Question 6 2010 Level 3 Exam for example:

The duration of the GIC contract is 4 which is equal to it's maturity.

I'm guessing I'm supposed to use the following tree to decide which duration method to use:

1. If it's given, use the given
2. If it's a swap, use the 3/4 fixed maturity and 1/2 variable reset method
3. If it's neither, just use the maturity

Is this correct?

mik82

it is 0.75 even if its not given in the exam.

Iginla2011

BiPolarBoyBoston Wrote:
-------------------------------------------------------
> Welcome back JDV!!!
>
> Duration of a zero coupon bond = years to maturity
> so a bond with maturity of 10yrs with zero coupon
> has a duration of 10.
>
> For a floating rate bond/payment, it is 1/2 the
> time till the next payment date. So with swaps
> with semi-annual payments the duration is 1/4


Ok, thanks, I must have missed the zero coupon thing when reading.

Windjammer

Remember you are just making those assumptions because you are assuming you are in the middle of the life of the swap (hence half the duration for a variable). If you are valuing the swap right at the beginning, you do not take those 0.75 and 0.5 rules.


Can someone find the quote from the CFAI that takes the 0.75 for the fixed, never heard of that one.

former

brucesteve22 Wrote:
>
> I know that for Swaps, you do 3/4 the maturity for
> the Fixed Rate and 1/2 the reset date on the
> variable.


does it actually say somewhere in the curriculum that the fixed side duration can be estimated as 3/4 of the maturity? It seems incorrect to me to just assume this.

lcai

FinNinja Wrote:
-------------------------------------------------------
> brucesteve22 Wrote:
> >
> > I know that for Swaps, you do 3/4 the maturity
> for
> > the Fixed Rate and 1/2 the reset date on the
> > variable.
>
>
> does it actually say somewhere in the curriculum
> that the fixed side duration can be estimated as
> 3/4 of the maturity? It seems incorrect to me to
> just assume this.

Yes it does say assume that. 3/4 of fixed rate side - 1/2 of time until reset.

I would however think it is written somewhere on the exam.



Edited 1 time(s). Last edit at Wednesday, May 18, 2011 at 01:56PM by Paraguay.

wake2000

I think it has to be given but if not I would choose .75.