Yield and Yield Spread Measures for Floating-Rate Instruments
Floating-rate instruments, including floating-rate notes (FRNs or floaters) and most loans, are different from fixed-rate bonds. Rather than fixed coupon payments, they vary from period to period depending on the current level of a reference interest rate.
For an FRN, PMT is a function of the MRR and the quoted margin and r is a function of the MRR and the discount margin.
where
- PV = present value, or the price of the floating-rate note
- MRR = the market reference rate, stated as an annual percentage rate (it is sometimes known generically as Index)
- QM = the quoted margin, stated as an annual percentage rate
- FV = the future value paid at maturity, or the par value of the bond
- m = the periodicity of the floating-rate note, the number of payment periods per year
- DM = the discount margin = required margin stated as an annual percentage rate
- N = the number of evenly spaced periods to maturity
