Updated for the 2026-2027 CFA® Level I curriculum.
A floating-rate note resets its coupon using a reference rate plus a contractual spread. Its market price depends on how that quoted margin compares with the spread investors currently require.
Quick Answer
The quoted margin is added to the reference rate to set the coupon. The required margin reflects current compensation demanded by investors. The discount margin is the constant spread over projected reference rates that makes present value equal the observed price.
Key Takeaways
Coupon rate equals reference rate plus quoted margin.
Quoted margin is contractual; required margin is market-based.
Discount margin solves the present-value equation.
A required margin above the quoted margin pushes price below par.
A floater can move away from par despite periodic resets.
What You Need to Know for CFA Level I
Calculate a reset coupon rate and payment.
Convert basis points correctly.
Distinguish quoted, required, and discount margins.
Interpret price relative to par.
Fixed-rate spread measures and money-market yield conventions are covered in separate notes.
How Is a Floating-Rate Coupon Set?
At each reset date, the coupon rate is set by adding the contractual quoted margin to the current reference rate. For periodic payments, convert that annualized coupon rate to the appropriate rate per payment period.
For m payments per year:
where:
= coupon rate that applies in period t
= reference rate observed for period t
= coupon payment in period t
= face value
= quoted margin fixed in the contract
= number of payments per year
= payment period
Quoted Margin vs Required Margin
The quoted margin is fixed in the contract. The required margin changes with issuer credit, liquidity, and market conditions. If the two are equal at a reset date, price should be near par, other things equal.
What Is Discount Margin?
Discount margin DM is the spread that solves:
where:
= current price of the floating-rate note
= coupon payment in period t
= face value
= quoted margin
= discount margin
= payments per year
= number of remaining payment periods
The calculation may project reference rates and use iteration.
How Margin Changes Affect a Floater's Price
The quoted margin fixes the contractual spread, while investors can change the margin they require. Compare the two to predict whether the floater is likely to trade near, above, or below par.
Relationship | Expected price |
|---|---|
Quoted margin = required margin | Near par |
Quoted margin > required margin | Above par |
Quoted margin < required margin | Below par |
Worked Floating-Rate Spread Example
A reference rate of 4.2% plus a 130-basis-point margin gives a 5.5% annualized coupon rate. If the required margin rises to 170 basis points, the contractual margin is too low for current conditions, so the note trades below par.
Working Example
For USD 1,000 face value and semiannual payments, the next coupon is . A market price below par is consistent with a discount margin above the quoted 1.30% margin. The spread comparison, not the reset alone, explains the price.
Common Exam Traps
Treating quoted margin as the market's current required margin
The quoted margin is fixed by the note's contract and added to its reference rate; the required margin can change as credit and liquidity conditions shift.
Adding basis points as whole percentage points
One hundred basis points equals one percentage point. A reference rate of 4.2% plus 130 basis points gives a 5.5% annualized coupon rate.
Assuming every floater trades exactly at par
Price can depart from par when the required margin differs from the quoted margin, between reset dates, or because of credit and other terms.
Applying a fixed-rate bond's spread calculation without checking reset mechanics
A floater's coupon changes with its reference rate, so distinguish a contractual quoted margin from valuation measures that incorporate market-required returns.
Ignoring assumptions about future reference rates
A valuation spread can depend on projected future coupons and reset dates; do not treat the next known coupon as every future coupon.
Practice Question
A floating-rate note resets at a reference rate of 4.2% plus a quoted margin of 1.3%. Its next annualized coupon rate is:
2.9%
4.2%
5.5%
Correct Answer: Option C
The annualized coupon rate equals the 4.2% reference rate plus the 1.3% quoted margin, producing 5.5%.
Option A: The quoted margin is added to the reference rate, not subtracted from it.
Option B: Using only the reference rate ignores the 1.3% quoted margin.
Continue Your CFA Level I Prep With KeyPoint
Use structured lessons, practice questions, mock exams, and progress tracking to focus on the time you have left
FAQs About Yield Spread Measures for Floating-Rate Instruments
What is the quoted margin on a floating-rate note?
It is the fixed contractual spread added to the reference rate at each reset.
What is discount margin?
It is the spread over projected reference rates that makes present value equal market price.
Why can a floating-rate bond trade below par?
Its quoted margin may be less than the margin investors currently require.