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.
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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