Floating Rate Notes (FRN)

FRN are valued based on a spread over a reference or “index” rate, (ie. LIBOR).

The term “quoted margin” refers to the specific yield spread over the reference
rate and the term “required margin” (or “discount margin”) refers to the yield
spread making the bond valued at par on the reset date.

Be Aware:

The quoted margin, which is the spread over the reference rate, can be positive or
negative!

Changes in the required margin result from changes in the issuer’s credit quality.

Quick Points to Know:

If the required margin is greater than the quoted margin, the FRN will be
priced at a discount

If the required margin is less than the quoted margin, the FRN will be priced
at a premium

When the required margin is equal to the quoted margin, the floater will be
priced at par

Arrears – means the reference rate is determined at the beginning of the

period and the interest payment is made at the end of the period.

Formulas to Know:

Cash flow per time period:

= [(Reference Rate + Quoted Margin) x (Face Value)] / Payment Frequency

Discount rate per time period:

= (Reference Rate + Require Margin) / Payment Frequency

Value of a FRN:
= Present Value of each Cash Flow using the Discount rate per time period