ABSTRACT
In order to apply the standard redemption yield calculations to floating rate notes (FRNs), one has to make assumptions about future coupon payments. This is obviously a very difficult thing to do accurately, with the result that a different approach is frequently used. Most FRNs have a known first/next coupon payment, while subsequent coupons will usually be set in terms of a margin over a specified indicator rate. As a result a current margin relative to the indicator rate is often calculated. This chapter describes two types of margin calculations, simple margins and discounted margins. The simple margin formula measures the return that can be obtained on the FRN relative to the indicator rate. Its calculation consists of two parts: the quoted margin of the security above or below the indicator rate; the average annual capital gain or loss to redemption, after allowing for differences in the indicator between the last coupon fixing date and the trade date.
