The duration of a floating rate bond is the time it takes for the bond’s cash flows to be equal to the bond’s current price. In other words, it’s how long it will take for the bond to “pay for itself.” The duration of a floating rate bond can be affected by a number of factors, including changes in interest rates, changes in the bond’s coupon rate, and changes in the bond’s price.

Duration and Floating Rate Bond (FRN)

Duration is a measure of a bond’s sensitivity to changes in interest rates. It is calculated by taking the weighted average of all of the bond’s cash flows, discounted at the current yield. The longer the duration, the more sensitive the bond is to changes in interest rates. For example, if interest rates rise by 1%, a bond with a duration of 5 years will lose 5% of its value.

The duration of a floating rate bond can be affected by changes in the coupon rate. If the coupon rate goes up, the duration will go down. This is because the higher coupon payments will come sooner, which reduces the present value of those payments. Similarly, if the coupon rate goes down, the duration will go up.

Finally, the duration of a floating rate bond can also be affected by changes in the bond’s price. If the price goes up, the duration will go down. This is because higher prices mean that more payments have been made and there are fewer payments left to be made. Conversely, if prices go down, durations will go up.

Conclusion

The duration of a floating rate bond is an important concept for investors to understand. It can be affected by changes in interest rates, changes in the bond’s coupon rate, and changes in the bond’s price. By understanding how these factors affect duration, investors can make more informed decisions about when to buy and sell bonds.