Question

A 5-year floating-rate note pays 6-month Libor plus 80 bps. The floater is priced at 97...

A 5-year floating-rate note pays 6-month Libor plus 80 bps. 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 is closest to:    a. 118 bps.
       b. 144 bps.
       c. 242 bps.
       d. 180 bps.
       e. 236 bps.

Homework Answers

Answer #1

Answer : Correct Option is 144bps.

Calculations :

Discount Margin = Yield Rate - Current 6 month Margin.

Calculation of Yield Rate

Yield Rate can be calculated using Rate function of Excel :

=RATE(nper,pmt,pv,fv)

where

nper is the number of periods i.e 5 * 2 = 10

pmt is [(1% + 0.80%) * (180 / 360)] = 0.90

pv is -97

fv is 100

=RATE(10,0.9,-97,100)

The yield Rate is 1.2205%

Yield Rate (Annual ) = 1.2205% * 2 = 2.441%

Discount Margin = 2.441% - 1%

= 1.441 % or 144 basis points

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