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

A floating-rate note pays interest at 3-month reference rate plus a quoted margin. The required margin that investors demand for the note's credit risk and liquidity is higher than the quoted margin. On a reset date, the note will most likely be priced:

The note will most likely trade at a discount to par. The coupon already resets to the reference rate, but its quoted margin is smaller than the margin investors require, so the cash flows are discounted at a higher rate than they earn, pushing the price below par.

  1. Aat a discount to parCorrect
  2. Bat par
  3. Cat a premium to par

Explanation

A floater priced at par at reset requires the quoted margin to equal the required margin. If the required margin exceeds the quoted margin, the coupon is too low relative to what investors demand, so the price falls below par. A premium would occur only if the quoted margin exceeded the required margin.

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