Lesson 2 of 5 · 14 min
Pricing an FRN and estimating its discount margin
A simplified model prices a floater like a fixed bond: the coupon uses MRR + quoted margin, the discount rate uses MRR + discount margin, and solving backwards from a price gives the discount margin.
In short
- Simplified model: coupon per period = ; discount rate per period = .
- To price an FRN: compute PMT and r, then use the bond keys (N, I/Y, PMT, FV → CPT PV).
- To estimate the DM from a price: compute PMT, solve for the periodic rate r (CPT I/Y), then .
- Assumptions: valued on a reset date (no accrued interest), 30/360 with evenly spaced periods, and the same MRR for every future period.
- So the DM is only an estimate that depends on the model; fuller models use projected future rates and spot rates.
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