5. DURATION OF INVERSE FLOATERS Assume that LIBOR rates are risk free. Suppose you have a 10 year note that pays a quarterly coupon
 5. DURATION OF INVERSE FLOATERS Assume that LIBOR rates are risk free. Suppose you have a 10 year note that pays a quarterly coupon of (10% - 2 3mo LIBOR), divided by 4 since this is a quarterly coupon. Such a note is called an inverse floater. Suppose the face value is $100, the first LIBOR amount has not yet been fixed, and a flat rate curve of 4% quarterly compounded. (a) What is the price of the bond? (Hint: Replicate with floating rate bonds, coupon bonds and zero coupon bonds). (b) What is the modified duration? (Hint: Find price as a function of interest rate, and take the derivative). (c) Compare the modified duration to the maturity. Do you find this surprising?
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To address the questions about the inverse floater bond well go through each part step by step 1 Understanding the Inverse Floater Bond Coupon Payment The bond pays a quarterly coupon of 10 2 3moLIBOR ... View full answer
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Authors: Chad J. Zutter, Scott B. Smart
15th edition
013447631X, 134476315, 9780134478197 , 978-0134476315
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