CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments
An analyst values a floating-rate note using a discount margin. Compared with the FRN's quoted margin, a discount margin that is lower than the quoted margin most likely indicates that the note:
The note most likely trades at a premium to par. When the discount margin is below the quoted margin, the coupon pays more than investors require, so discounting the cash flows at the lower required rate gives a present value above face value.
- Atrades at a premium to parCorrect
- Btrades at a discount to par
- Chas a coupon fixed for life
Explanation
A lower required margin than the quoted margin means the coupon exceeds the return investors require, so cash flows discounted at the lower rate sum to more than par. The note therefore trades at a premium. The other options contradict this relationship.
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