CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments
Between reset dates, an FRN's price is most likely to deviate from par because:
Price deviates from par mainly because market reference rates can change after the coupon is set. The coupon only adjusts at the next reset, so until then the note's cash flows are discounted at a rate that differs from the coupon rate.
- Athe reference rate changes before the next resetCorrect
- Bthe coupon is fixed at issuance
- Cthe discount margin equals the quoted margin
Explanation
The coupon is set at the start of each period, so a move in market rates during the period is not reflected until the next reset, creating a small price deviation from par. A fixed coupon and equal margins do not describe floating notes that cause deviations.
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