# quoted margin

You add the margin to the reference rate. If the margin is negative, the result will be less than the reference rate, but you’re still not deducting the margin; you’re simply adding a negative number.

i didnt quite understand…when can margin be in negative? any example? i think Margin is generally a sort of risk premium so that must be positive.

Quoted margin is a spread than can be above or below the reference rate resulting finally in the coupon rate of the bond. If the reference rate is above the coupon rate it is because you had a negative quoted margin.

coupon rate = reference rate + quoted margin

I’ve never seen a negative margin.

I was simply explaining that you only add it to the reference rate; you never deduct it from the reference rate.

I saw an article a few months back where some extremely well capitalized individuals received mortgage rates at a negative to the reference rate in Europe. When rates dropped the mortgage contracts didn’t have a floor and the banks ended up paying the borrower. Banks didn’t pay, borrowers sued, courts sided with borrowers. Interesting read, and they were seasoned mortgages a few years old back when times were good so I guess they never thought to include floors back then.

You dont need to come up with a numerical answer. you have to understand what it would mean to have a negative quoted marging.

the interest rate charged = benchmark rate + quoted margin.

lets say the benchmark rate is Libor. This is the rate at which a large international bank in London would pay to borrow from another bank. If you or myself wanted to borrow, since we are more risky than the large bank, they would lend us at Libor + 2% for example. The 2% is additional compensation they require on top of Libor to accept to lend us money.

So, if the quoted margin (2% in my example above) is negative, it means that the person/entity being quoted a rate is LESS RISKY than the benchmark rate. SO if I can borrow at less than Libor, it is because I have a level of risk that is lower than the risk of those who are able to borrow at Libor.

Now lets generalize and end: if the quoted margin is negative, it simply means that the rate charged is less than what you charge for someone who can borrow at the benchmark rate. You want less interest rate from him because he’s less risky. say the US government wanted to borrow, if it was quoted in term of Libor, it would be Libor MINUS an amount, to capture the idea that the US gov is less risky than the large banks which can borrow at Libor. Naturally, the US gov is not quoted at Libor MINUS because theres a US rate, hence the answer of S2000magician that you dont see in real life negative quoted margins.

hope that helped

Cheers