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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 the reference rate plus a quoted margin. The required margin demanded by investors rises above the quoted margin because the issuer's credit quality deteriorates. All else equal, the FRN price on a reset date is most likely:

The price is below par. The coupon reflects the lower quoted margin, but investors now discount cash flows at the reference rate plus a higher required margin (discount margin), so present value falls short of the face value on the reset date.

  1. Aabove par
  2. Bbelow parCorrect
  3. Cequal to par

Explanation

The coupon is fixed at reference rate plus quoted margin, while investors discount at reference rate plus the higher required margin. Cash flows are discounted at a higher rate than the coupon implies, so the price is below par. Equal to par holds only when the required margin equals the quoted margin.

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