I am a long time investor in an active Australian Bond fund (set & forget type of thing) but lately I have been doing a lot of research and I have realised that bond managers use a lot of derivatives to manage risk and I'd really love to get a better understanding of it all.
Can someone please tell me how/why a manager would use interest rate swaps within a portfolio? I understand that these types of swaps basically swap a fixed rate for a floating rate, but how would it would within a bond portfolio sense?
I understand that a floating rate bond would have lower duration, so swapping out a fixed bond payment for a floating bond would mean would reduce the duration of the portfolio - is that correct? Do/can interest rate swaps do anything else to reduce interest rate exposure?
And finally does interest rate swaps do anything for the credit duration/credit risk of a portfolio?