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Floating-Rate Note Duration and Time to the Next Reset

Article Quant Q&A · Author: user394334
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Summary

This document poses a question about why the effective duration of a floating-rate note is often described as the time until its next payment. It gives the standard effective-duration definition, based on the bond's value after small upward and downward yield changes relative to its current value, and asks how that sensitivity relates to the next payment date.

No answer or supporting derivation is included. The material therefore identifies a fixed-income concept and a useful question, but does not explain the mechanism or establish the result. Any interpretation would need to distinguish the coupon payment date from the rate reset date and consider the note's conventions and valuation assumptions.

Key ideas

  • The document asks how a floating-rate note's effective duration relates to the time until its next payment.
  • It states that effective duration measures value sensitivity to small yield changes.
  • No explanation or derivation is provided, so the relationship remains unresolved in the source.

Tags

Fixed incomeRisk managementStatistics
Full text
# Why is the effective duration of a floating rate bond the time to the next payment?


# Why is the effective duration of a floating rate bond the time to the next payment?












I am wondering why the effective duration of a floating rate note is the time to the next payment. Effective duration is is defined as

$$\frac{V_{-\Delta y}-V_{+\Delta y}}{2V_0\Delta y},$$ for a small $\Delta y$. Why will this value be the time to the next payment for a floating rate note?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.