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

An FRN with a quoted margin of 0.50% and a reference rate of 3.00% is priced to provide a required margin of 0.90%. Coupons are annual, remaining maturity is 2 years, and par is 100. Using the simple discount-margin approach with the next coupon already set at 3.50%, and assuming the reference rate stays at 3.00% for later periods, the price is closest to:

The price is about 99.27, below par. The note is discounted at the reference rate plus the 0.90% required margin, or 3.90%, while its coupons carry only a 0.50% margin. Discounting 3.50 and 103.50 at 3.90% gives a price just under 99.3.

  1. A99.27Correct
  2. B99.63
  3. C100.00

Explanation

Discount rate = 3.00% + 0.90% = 3.90%. Coupons: year 1 = 3.50, year 2 = 3.50 + 100. PV = 3.50/1.039 + 103.50/1.039^2 = 3.3686 + 95.8794 = 99.248, about 99.25. Checking: 1.039^2 = 1.079521; 103.5/1.079521 = 95.88. The total is 99.25, closest to 99.27. The 99.63 option uses the wrong margin gap, and 100.00 ignores the margin difference.

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