Yield and Yield Spread Measures for Floating-Rate Instruments

How floating-rate notes are priced against a market reference rate, what the gap between the quoted margin and the discount margin says about price and credit risk, and how money market discount rates and add-on rates are converted to a bond equivalent yield so short-term instruments can be compared fairly.

1. 1. Floating-rate notes: quoted margin vs required marginA floater's coupon resets with the market reference rate, so its price moves away from par mainly when the margin investors require differs from the fixed margin the issuer promised.Free12 min
2. 2. Pricing an FRN and estimating its discount marginA simplified model prices a floater like a fixed bond: the coupon uses MRR + quoted margin, the discount rate uses MRR + discount margin, and solving backwards from a price gives the discount margin.Video · 7 min14 min
3. 3. Money market yields and the discount rate basisMoney market rates are simple, annualized rates with their own quoting rules; a discount rate divides the interest by the face value, so it understates the true return.12 min
4. 4. Add-on rates and certificates of depositWith an add-on rate, interest is added on top of the principal invested, so the rate is a true return on the amount invested, although still simple and not compounded.12 min
5. 5. Bond equivalent yield: comparing money market instrumentsTo compare short-term instruments fairly, restate every quote as a bond equivalent yield (a 365-day add-on rate), and convert periodicity when comparing with bond yields.Video · 7 min13 min