CFA Level I · CFA Level I Exam · Fixed-Income Cash Flows and Types
A floating-rate note pays a coupon equal to the 3-month reference rate plus a quoted margin of 0.80%, reset quarterly. If the reference rate rises sharply after a reset date, the note's coupon for the current period is most likely:
The current period's coupon is most likely unchanged until the next reset date. A floating-rate note fixes its coupon at each reset using the then-current reference rate plus the margin, so a later rise affects only the next period's coupon. The quoted margin stays constant.
- Aincreased immediately by the full rise in the reference rate
- Bunchanged until the next reset dateCorrect
- Creduced by the quoted margin until the next reset date
Explanation
The coupon is set at the start of each period using the reference rate at the reset date. A rate change in mid-period affects only the following period's coupon. The margin is fixed and is not reduced.
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