Why is the duration of a floating rate coupon zero at the


Question: 1. Why is the duration of a floating rate coupon zero at the reset date?

2. When interest rates go up, duration-based calculation shows that the value of the bond will go down and vice-versa. Why is the convexity adjustment always a positive amount regardless of the direction of the interest rate change?

3. When a bond goes on special, the repo rate for borrowing against that bond goes below the General Collateral Rate (GCR) which applies to all other Treasury bonds. Why does that not lead to arbitrage opportunities?

4. Why does an inverted yield curve (long rates lower than short rates) not (for example) result in Z(today for 10 year maturity) < Z(today for 1 year maturity), that is Z(0,10) < Z(0,1)?

5. What is factor neutrality? How does it help beyond calculations based on duration and convexity alone?

6. If the yield curve did not change (interest rates in the economy did not change at all) and the supply and demand for your bond in the market did not change, would the price of the bond you own still change from one day to another? Why?

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