Skip to content

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

An FRN pays 3-month reference rate plus 0.80% quarterly. The required margin in the market rises to 1.10% while the quoted margin stays at 0.80%, with no change in the reference rate. On the next reset date, the FRN will most likely be priced:

The FRN will most likely trade at a discount to par. Its coupon includes a quoted margin of 0.80%, but investors now require 1.10%, so the coupon is too low relative to the required return. The price must fall below par to compensate for the shortfall.

  1. Aat a discount to parCorrect
  2. Bat par
  3. Cat a premium to par

Explanation

When the required margin exceeds the quoted margin, the coupon is lower than investors demand, so the price is below par. The reference-rate reset does not offset a credit spread gap. Pricing at par requires the two margins to be equal.

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.

Practise Yield and Yield Spread Measures for Floating-Rate InstrumentsFree diagnostic mock

More Yield and Yield Spread Measures for Floating-Rate Instruments questions