CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments
A 2-year FRN pays quarterly at 3-month reference rate plus 1.20%, with par of 1,000,000. The reference rate at the start of a period is 4.00% (annualized), and interest is paid in arrears. The coupon payment for that quarter is closest to:
The quarterly coupon is about 13,000. The annualized coupon rate is the 4.00% reference rate plus the 1.20% margin, or 5.20%. Applied to par of 1,000,000 this is 52,000 per year, so one quarter pays 13,000.
- A10,000
- B13,000Correct
- C52,000
Explanation
Annual coupon rate = 4.00% + 1.20% = 5.20%. Quarterly payment = 1,000,000 × 0.052 / 4 = 13,000. The 10,000 option omits the margin (4%/4), and 52,000 is the annual coupon.
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