CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments
A floating-rate note pays the reference rate plus a quoted margin of 80 bps. The required margin is 100 bps for similar credit risk. The FRN most likely trades:
The FRN most likely trades at a discount. Its quoted margin of 80 bps is below the 100 bps required margin, so the coupon is insufficient, and the price must fall below par to give investors the extra yield they demand.
- Aat par
- Bat a premium
- Cat a discountCorrect
Explanation
The quoted margin of 80 bps is less than the required margin of 100 bps, so the coupon is lower than investors demand. The price must fall below par to raise the return, so the FRN trades at a discount. Trading at par requires equal margins.
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