CFA Level I · CFA Level I Exam · Fixed-Income Cash Flows and Types
A floating-rate note pays quarterly interest at the 3-month reference rate plus 80 bps, with a 4.00% cap and a 2.00% floor on the annual coupon rate. The reference rate resets to 3.60%. The annualized coupon rate applied for the next quarter is closest to:
The coupon rate is 4.00%. The reference rate of 3.60% plus the 0.80% spread gives 4.40%, but the cap limits the annual rate to 4.00%. The floor of 2.00% is irrelevant because the capped rate is above it.
- A3.60%
- B4.00%Correct
- C4.40%
Explanation
Uncapped rate = 3.60% + 0.80% = 4.40%. The cap limits the coupon to 4.00%, which is above the 2.00% floor. Choosing 3.60% ignores the spread, and 4.40% ignores the cap.
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