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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 discount margin is the spread over the reference rate used to discount the note's cash flows. The price of the note is most likely equal to par on a reset date when the discount margin is:

The note most likely trades at par when the discount margin equals the quoted margin. The coupon then matches the return investors require, so discounting at the reference rate plus that same margin returns par on a reset date. A larger discount margin lowers the price below par.

  1. Aequal to the quoted marginCorrect
  2. Bgreater than the quoted margin
  3. Cless than the quoted margin

Explanation

When the required discount margin equals the quoted margin, the coupon exactly compensates investors for the required return, so the FRN prices at par on a reset date. A higher discount margin gives a price below par, and a lower one gives a price above par.

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