An analyst evaluates the following information relating to floating rate notes (FRns) is- sued at par value that have 3-month libor as a reference rate: $\begin{array} { l c c }
\hline \text { Floating Rate Note } & \text { Quoted Margin } & \text { Discount Margin } \
\hline \mathrm { X } & 0.40 \% & 0.32 \% \
\mathrm { Y } & 0.45 \% & 0.45 \% \
\mathrm { Z } & 0.55 \% & 0.72 \% \
\hline
\end{array}$ based only on the information provided, the FRn that will be priced at a premium on the next reset date is:
A) FRn x.
B) FRn Y.
C) FRn Z.

Question

An analyst evaluates the following information relating to floating rate notes (FRns) is- sued at par value that have 3-month libor as a reference rate: $\begin{array} { l c c } 
\hline \text { Floating Rate Note } & \text { Quoted Margin } & \text { Discount Margin } \
\hline \mathrm { X } & 0.40 \% & 0.32 \% \
\mathrm { Y } & 0.45 \% & 0.45 \% \
\mathrm { Z } & 0.55 \% & 0.72 \% \
\hline
\end{array}$ based only on the information provided, the FRn that will be priced at a premium on the next reset date is:
A) FRn x.
B) FRn Y.
C) FRn Z.

Quizplus · Accepted Answer

FRn X has a quoted margin of 0.40% and a discount margin of 0.32%. This means that the FRn is currently trading at a premium of 0.08% (0.40% - 0.32%). On the next reset date, the FRn will be priced at a premium if the 3-month libor rate increases by more than 0.08%.

An Analyst Evaluates the Following Information Relating to Floating Rate