CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments
A one-year FRN with face value 100 pays quarterly coupons at three-month reference rate plus a quoted margin of 0.80%. The reference rate is assumed constant at 2.00% and the discount margin is 1.20%. Ignoring accrued interest, the FRN price is closest to:
The price is about 99.70. Quarterly coupons of 0.70 are discounted at 0.80% per quarter, reflecting the 1.20% discount margin over the 2.00% reference rate. Because the discount margin exceeds the 0.80% quoted margin, the price falls slightly below par.
- A99.70Correct
- B99.90
- C100.30
Explanation
Coupon = (2.00%+0.80%)/4 x 100 = 0.70. Discount rate per period = (2.00%+1.20%)/4 = 0.80%. PV = 0.70/1.008 + 0.70/1.008^2 + 0.70/1.008^3 + 100.70/1.008^4 = 0.6944+0.6889+0.6834+97.5 ≈ 99.70 (approximately). Price below par because DM exceeds quoted margin.
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