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CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments

An analyst compares two FRNs from the same issuer with identical maturities. FRN X has a quoted margin of 0.50% and FRN Y has a quoted margin of 0.90%. The required margin for both is 0.70%. On a reset date, the analyst would most likely conclude that:

FRN X trades at a discount and FRN Y at a premium. X pays a margin below the 0.70% the market requires, while Y pays more than required. Reset only aligns the reference rate, so margin differences still drive price away from par.

  1. AFRN X trades at a premium and FRN Y at a discount
  2. Bboth FRNs trade at par because both reset to the reference rate
  3. CFRN X trades at a discount and FRN Y at a premiumCorrect

Explanation

If the quoted margin is below the required margin, the FRN trades at a discount (X: 0.50% < 0.70%). If the quoted margin exceeds the required margin, it trades at a premium (Y: 0.90% > 0.70%). Resetting only removes reference-rate risk, not the margin mismatch.

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