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

Which factor would most likely cause an FRN's required margin to increase, all else equal?

A deterioration in the issuer's credit quality would most likely raise the required margin. The margin compensates investors for credit and liquidity risk, while reference rate changes flow through the coupon and reset timing affects price stability rather than the required spread.

  1. AA decline in the reference rate
  2. BA deterioration in the issuer's credit qualityCorrect
  3. CA shorter time to the next reset date

Explanation

The required margin reflects credit risk and liquidity. A deterioration in credit quality raises the compensation investors require. Changes in the reference rate are passed into the coupon, not the margin, and a shorter reset period reduces price sensitivity rather than raising the margin.

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