CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments
An analyst holds a floating-rate note whose quoted margin is 90 bps. After the issuer's credit quality deteriorates, the market requires a discount margin of 140 bps. Immediately after the next reset date, the price of the note is most likely:
The price is most likely below par. The quoted margin of 90 bps is lower than the 140 bps the market now requires, so coupons fall short of the required return. Resetting the reference rate does not remove this credit spread gap, leaving a discount.
- Aabove par
- Bequal to par
- Cbelow parCorrect
Explanation
The required discount margin of 140 bps exceeds the quoted margin of 90 bps, so the coupon is lower than the return investors demand. The cash flows are discounted at a higher rate than the coupon rate implies, which puts the price below par even after a reset.
Did you get it right without looking?
One question tells you little. A timed set on Yield and Yield Spread Measures for Floating-Rate Instruments shows your real accuracy, how long you take and where you lose marks.
More Yield and Yield Spread Measures for Floating-Rate Instruments questions
- A floating-rate note (FRN) pays a coupon equal to a reference rate plus a fixed spread, reset at each coupon date. The quoted margin is best…
- An analyst values a two-year annual-pay FRN with par of 100, a quoted margin of 50 bps, and a required margin of 90 bps. The reference rate …
- Money market instruments are most likely quoted on a yield basis that differs from bond-market conventions. Which of the following statement…
- 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…
- Compared with a fixed-rate bond of the same maturity, a floating-rate note with a constant quoted margin most likely has price sensitivity t…
- In the valuation of a floating-rate note (FRN), the quoted margin is best described as: