CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Floating-Rate Instruments
In the valuation of a floating-rate note (FRN), the quoted margin is best described as:
The quoted margin is the fixed spread over the reference rate that is set at issuance and added to the reference rate to set each coupon. It is not only credit compensation, and it is not a price discount or premium relative to par.
- Athe spread over the reference rate set at issuanceCorrect
- Bthe yield premium for the issuer's credit risk only
- Cthe difference between the FRN price and par
Explanation
The quoted margin is the fixed spread over the reference rate (e.g., a benchmark rate) set when the note is issued, and it is added to the reference rate to determine each coupon. It compensates for credit risk but also for liquidity and other factors, so it is not purely credit-related. It is also not a price difference from par.
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