Floating Rate Notes - Required Margin and Quoted Margin

Can anyone explain what the Required Margin and Quoted Margin are for a floating rate note? I have read the definitions of both from the CFAI material but they seem so similar in their explanation that I just don’t understand/see the difference.

Anyone have a basic concept of the two so I can understand better?

I think it is as simple as this:

Quoted Margin: The margin you add to LIBOR to calculate the coupon payment (PMT)

Required Margin: The margin you add to LIBOR (margin + LIBOR = YTM) in order to calculate PV, n, etc. (assuming you already have calculated the PMT above)

Just make sure that both are adjusted on a quarterly or semi-annual basis if needed.

Similar to coupon rate and YTM’s relationship, if quoted is higher than required the bond is at premium (if lower, at discount).

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I agree with thisisnick.

Consider qouted margin as coupoun yield based on floating rate LIBOR + BPS (markup). In practice may be any other basic interest rate as EURIBOR, EONIA etc…but it is likely that on exam will be LIBOR, whatever principle is the same.

Required margin is YTM of FNR also based on floating rate (LIBOR + BPS markup).

As thisisnick says, watch out on period adjustments (semi-annual basis).

Could anyone help me with this question:

A two-year floating-rate note pays 6-month Libor plus 80 basis points. The floater is priced at 97 per 100 of par value. Current 6-month Libor is 1.00%. Assume a 30/360 day-count convention and evenly spaced periods. The discount margin for the floater in basis points (bps) is closest to:

  1. 180 bps.
  2. 236 bps.
  3. 420 bps.

The answer is B.

I do the calculation and find 3.36 for the YTM. Could anyone explain why I would subtract 1 from 3.36? thanks

It asked you to calculate discount margin. Margin is BPS rate added to basic rate (LIBOR). Since 6m LIBOR is 1%, discount margin was substracted from total YTM of 3,36% which exactly is 3,36% - LIBOR (1%) thus 236 BPS or 2,36%.

Required Margin: 3.36% - 1.0% = 2.36%

The question is asking you to calculate the required margin that is added to the LIBOR (YTM - LIBOR). But I got confused with the 6-month LIBOR while calculating.

Peeps, I got the answer using the calculator, but could not get the correct answer manually, can someone please solve the above question here.

PMT: (1.00% + 0.80%) x (180/360) x 100 = 0.90

FV: 100

PV: -97

n: 4

I/Y = 1.68% x 2 = 3.3636%

I had trouble with that as well.

‘Current 6-month Libor is 1.00%.’ In all the questions is the interest rate given always annual rate ? Like in this case the interest rate is of 6 month Libor but it is scaled up to 12 months (x2). If yes, then why is it so ?

I know how to calculate it, and @ Thisisnick, i can also calcuate it through the process you have highlighted, i want to see the step-on-step approach…

I got the answer using the calculator, but found it hard to replicate the same answer manually.

Hello everybody,

I am thinking about the same thing as Gigaloo (just a few years later). I mean, how can a 6-month LIBOR be considered as an annual rate? This is very confusing and counter-intuitive - I hope someone is able to help me with that…

Thx in advance and best regards!

Try understanding as to how a floating rate bond would work. The coupon each period is set equal to the market rates at the start of the period.

When you observe the market rates, you usually observe the LIBOR - the London inter bank offer rate. Now obviously the bank offer rate is lesser than what you would expect form the bond. So there is some margin that is added. The quoted margin of say 1% means that the bond would be paying 1% over and above the LIBOR. Does it mean it should trade at a premium? No, because 1% might be the required spread for the riskiness. In fact this quoted margin remains constant in the sense that the bond will always pay 1% over and above the LIBOR.

So what happens when the required margin for riskiness is 2% over LIBOR?

Well, the quoted margin doesn’t change but the bond will now trade at a discount. The discount in his case is because the coupon = LIBOR + 1% ; required return = LIBOR + 2%

Or the market rate plus a spread, just to be clear.

Yes, that’s right !