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CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments

A floating-rate note has a quoted margin of 60 bps and trades at a price of 100.50 per 100 par with two years to maturity, with the required margin lower than the quoted margin. Holding all else constant, the discount margin is most likely:

The discount margin is most likely less than 60 bps. A price above par means the quoted margin exceeds the return investors need, so the margin that equates present value to the 100.50 price must be lower than the quoted margin.

  1. Aequal to 60 bps
  2. Bless than 60 bpsCorrect
  3. Cgreater than 60 bps

Explanation

A price above par means the coupon margin exceeds what investors require. The discount margin is the required margin that equates PV to price, so it must be below the quoted margin of 60 bps. A margin equal to 60 bps would price the note at par.

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