CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments
A floating-rate note pays a coupon equal to a reference rate plus a fixed spread, reset at the start of each period. The fixed spread over the reference rate is most likely called the:
The fixed spread added to the reference rate in an FRN's coupon formula is the quoted margin. It is set at issuance. The required margin, or discount margin, is different because it is the spread investors currently demand and varies with credit risk and market conditions.
- Aquoted marginCorrect
- Bdiscount margin
- Crequired margin
Explanation
The quoted margin is the fixed spread over the reference rate stated in the FRN terms. The required margin (discount margin) is the spread that investors currently demand to price the note at par, and it changes with credit conditions and market demand.
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