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CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields

A floating-rate note pays 3-month reference rate plus 80 bps quarterly. An analyst finds the required margin on comparable notes has risen to 110 bps just after a reset. Compared with its price just before the change in required margin, the note's price will most likely:

The price will most likely fall slightly below par. The coupon margin of 80 bps is now less than the 110 bps investors require, so discounting at the higher required margin lowers present value. The effect is small because the reference rate component resets and keeps interest rate risk low.

  1. Arise slightly above par
  2. Bremain unchanged at par
  3. Cfall slightly below parCorrect

Explanation

The coupon earns reference rate plus 80 bps but investors now discount at reference rate plus 110 bps. The 30 bps shortfall over the remaining life reduces present value, so the price is below par. The reference rate resets, so it does not offset the margin gap. The price effect is small because of the short reset period and the limited margin differential.

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