Module 54 Yield Spread Measures for Floating Rate Instruments Flashcards
(11 cards)
Why are the values of floating rate instruments more stable than fixed rate instruments?
Floating rate instruments are more stable because the coupon rate is reset periodically based on a variable market reference rate
What is the difference between the quoted Margin and Discount MArgin
Quoted Margin = Margin that is the added margin above the MRR
Discount Margin = Margin that is required by investors
How do you work out the discount Margin
Working out the YTM using the discount Margin as the Coupon rate
Then you need to deduct MRR from it (YTM - MRR) = Discount Margin
What happens if Discount Margin = Required Margin
Then Instrument will trade at Par
What is the decider on what the Quoted Margin is
The credit risk of the issuer, if the credit risk of the issuer stays the same, the QM will stay the same as the DM, if the credit quality drops, then the DM will be greater than the QM and the FRN will trade at a discount to PAR
What are the differences for computing Yields for Money Market Instruments vs Bonds
1) Yields on Bonds (YTM): This is always an annualised yield that is compounding, whereas Money Market Instrument yields are yields that are not compounded, which is simple interest.
2) Furthermore, Yields on bonds typically use a common periodicty, whereas Money Market Instrument Yields have very different periodicities.
3) Money Market Instruments use non standard formulas to calculate non-standard instruments.
What are the two types of Money Market Rates?
Discount Rates: Annualised current discounts from the face value of money market securities recieved at maturity
Add on Rates: The interest to be earned on the amount paid or deposited today.
What is the discount rate Approach?
PV = FV x (1- days/year x DR)
or DR = FV-PV/FV x Year/Days
or Discount on security x 360/days to maturity
* So discount rate is computed on Face Value
* Typically only used for Commercial Paper, Treasury bills, etc.
What is the Add on Approach?
Calculation: HPY x 365 / days to Maturity
or PV = FV / (1+Days/year x AOR) or
AOR = (FV-PV / PV) * Years(365)/ Days
What is a Bond Equivalent Yield?
Add on yield based on a 365 day year.
