A Simple Floater Valuation Model

Remember from Chapter 3 that the reason why a fixed-rate bond trades at a premium or discount is that the coupon rate (what you are promised to receive from the issuer) is more or less than the yield to maturity (what you would need to pay par value). The same idea applies to a floating-rate note—the amount of the premium or discount is the present value of the difference between the fixed margin (the “quoted margin”) and the required margin (which, following market terminology, is called the “discount margin”) in order for the floater to trade at par value. The quoted margin is what you get; the discount margin is what you need.

Consider a floating-rate note that resets its interest rate PER times per year—that ...

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