Book 4_Fixed_READING 56_YIELD AND YIELD SPREAD MEASURES FOR FLOATING-RATE INSTRUMENTS

Question 1

Floating-rate notes (FRNs)

Answer 1

pay a coupon equal to a fixed quoted margin (QM) relative over a market reference rate (MRR)

Question 2

The required margin (or discount margin) on an FRN

Answer 2

is the extra return over MRR demanded by investors due to credit and liquidity risk of the issuer

Question 3

At issuance, FRNs usually have a quoted margin (QM) equal to the discount margin (DM);

Answer 3

hence, the FRN is issued at par value.

Question 4

When credit conditions deteriorate and the discount margin rises above the quoted margin,

Answer 4

the FRN will trade below par.

Question 5

When credit conditions improve and the discount margin falls below the quoted margin

Answer 5

the FRN will trade above par.

Question 6

For money market instruments, yields may be quoted on a discount basis or an addon basis, and they may use 360-day or 365-day years.

Answer 6

A bond equivalent yield is an add-on yield based on a 365-day year

Question 7

quoted add-on yield

Answer 7

Are simply the interest to be earned on the amount paid or deposited today
= HPY * 365 / days to maturity

Question 8

quoted discount yield

Answer 8

are annualized current discounts from the face values of money market securities received at maturity
= actual discount on the security × 360 / days to maturity