Lesson 1 of 5 · 12 min
Floating-rate notes: quoted margin vs required margin
A floater's coupon resets with the market reference rate, so its price moves away from par mainly when the margin investors require differs from the fixed margin the issuer promised.
In short
- A floating-rate note (FRN) pays a coupon of market reference rate (MRR) + quoted margin, reset on set dates. The rate is fixed at the start of each period and paid at the end (in arrears).
- The quoted margin (QM) is fixed in the contract. The required margin, also called the discount margin (DM), is the spread the market demands today.
- On a reset date: DM = QM → par; DM > QM → discount; DM < QM → premium.
- The discount (premium) equals the PV of the per-period shortfall (excess) of for the rest of the note's life.
- The required margin changes mainly with the issuer's credit risk, and also with liquidity or tax status. Macro, "top-down" factors work through the MRR instead.
- A floater's price risk from rate changes is small and depends on the time to the next reset: the longer the reset period, the more it behaves like a short fixed-rate bond.
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