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

When calculating the discount margin for an FRN, an analyst uses a projected reference rate path to estimate future coupons. The discount margin is best described as the:

The discount margin is the constant spread over the reference rate that, when added to projected reference rates for discounting, makes the present value of the FRN's expected cash flows equal its market price. It measures the return over the reference rate that the market requires.

  1. Aconstant spread added to the reference rate that equates the present value of projected cash flows to the FRN's priceCorrect
  2. Bdifference between the FRN's quoted margin and the current reference rate
  3. Cyield difference between the FRN and a Treasury bond of the same maturity, measured at issuance

Explanation

The discount margin is the spread over the reference rate used as the discount rate that makes the PV of projected FRN cash flows equal its market price. It is not the quoted margin minus the reference rate, nor a Treasury spread.

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