When Floating-Rate Notes Trade at Par on Reset Dates

Summary

The document examines the common claim that a floating-rate note trades at par on each coupon reset date, asking whether this remains true when the issuer's credit quality changes. The response confirms that credit deterioration can affect the note's price, so reset timing alone does not guarantee par value.

Par pricing requires the margin added to the reference rate when setting the coupon to match the margin used to discount the note's cash flows. This condition also assumes that the relevant reference and discount curves coincide. If the reset margin and discount margin differ, the note can trade away from par despite having just reset. The answer points readers toward a foundational industry guide on floating-rate notes, but provides no worked example or treatment of additional curve, liquidity, or optionality effects. Its conclusion is therefore a useful pricing condition, rather than a universal valuation formula for every FRN.

Key ideas

• An FRN does not necessarily trade at par on a coupon reset date.
• Par pricing requires the coupon reset margin to equal the discount margin.
• The stated condition assumes the reference and discount curves are the same.
• Changes in issuer credit quality can alter the discount margin and move the note away from par.

Tags

# Do FRN's *always* trade on par on reset days, regardless if the issuer's credit quality has changed?


# Do FRN's *always* trade on par on reset days, regardless if the issuer's credit quality has changed?












I keep reading that floating rate notes trade on par on coupon reset days.

Is this always true, regardless of changes in the issuer's credit quality since the FRN was issued?

It seems probably that a change in the issuer's perceived credit quality should be visible in the price, but I am a novice in this area...

## Answer by Nicholas (score 1)

https://quant.stackexchange.com/a/22093

your concern about issuer's credit quality deterioration is valid. price would be par when a spread over reference index for the purpose of coupon determination is the same as a spread used for discounting (subject reference curve and discount curves are the same) - i.e. reset margin equals discount margin.

have a look at seminal paper Salomon Brothers - An Investor's guide to FRNs

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.