CFA Practice Question

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CFA Practice Question

If a FRN is priced at par value on a rate reset date, subsequent increases in the required margin of the floater will cause it to be priced ______ on the next rate reset date.

A. at a discount below par value
B. at a premium over par value
C. the same as the par value
Correct Answer: A

User Contributed Comments 3

User Comment
HolzGe1 Simply put: investors require a higher margin, for an increased credit risk for example. They're not going to get it directly because the quoted margin is fixed (in this case), so the FRN is priced at a discount.
mfm102 Equation 8 -> numerator/denominator ;
denominator is {1 + [(index+DM)/m]}
so when Discount Margin (or required margin), price will be lower
khalifa92 equired margin = market interest rate
quoted margin = coupon payments

coupons or quoted margin < required margin or market r = discount
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