LM8: Yield and yield spread measures for floating-rate instruments

coupon payment

= MRR + QM

discount rate

= MRR + DM

quoted margin

is a specified yield spread added to the MRR to calculate the coupon payment on each reset date

required margin or discount margin

is the yield spread required by investors and to which the quoted margin must be set for the FRN to be priced at par value on a reset date

QM = DM

par bond

DM > QM

discount bond

DM < QM

premium bond

MRR

is determined at the beginning of the period

interest payment

• is made at the end of period

• this payment structure is called “in arrears”

discount rate (DR)

• DR = (Year/days) x [(FV-PV)/FV]

• face value at maturity

• typical instruments: commercial paper, treasury bills, bankers’ acceptances

add-on rate (AOR)

• AOR = (Year/days) x [(FV-PV)/PV]

• price at issuance

• typical instruments: bank certificates of deposit, repurchase agreements, MRRs

money market rates

• are quoted as either discount rates or add-on rates

• a money market rates stated on a 365-day add-on-rate basis is known as a bond equivalent yield

bond equivalent yield

= HPY x (365/days)

HPY

= (FV/PV) - 1