CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments
A two-year floating-rate note pays annual coupons at the 1-year reference rate plus a 1.00% quoted margin and has a par value of 100. The reference rate for the first year is 3.00%, projected at 3.00% for year two, and the required discount margin is 1.50%. The first coupon is paid in one year. The price of the note is closest to:
The note is worth about 99.06. The annual coupon is 4.00 (3.00% plus 1.00%) and the discount rate is 4.50% (3.00% plus the 1.50% discount margin). Discounting 4 at year one and 104 at year two gives roughly 99.06, below par.
- A98.12
- B99.06Correct
- C99.55
Explanation
Coupon = 4.00. Discount rate = 3.00%+1.50% = 4.50%. PV = 4/1.045 + 104/1.045^2 = 3.8278 + 95.2352 = 99.06. Using the coupon-on-par shortcut or the wrong rate 4.00% would give 100, and ignoring the second coupon would give a lower value.
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