Why a Floating-Rate Note Can Rise as Its Discount Margin Widens

Summary

The document asks why a floating-rate note’s price might rise even as its discount margin widens, given the intuition that a higher required return should lower bond value. The response gives a brief possible explanation: if the note is trading below par, it can move toward par while its discount margin stays unchanged, allowing the price to increase during that period.

This points to price convergence as a factor separate from the effect of a change in required margin. The answer is conditional and does not explain a specific security, quantify the competing effects, or establish that convergence accounts for an observed widening discount margin. Further details about the coupon reset, cash flows, and timing would be needed to assess a particular case.

Key ideas

• A bond trading below par may rise toward par even with an unchanged discount margin.
• Price convergence can affect an FRN’s price independently of margin changes.
• The brief explanation does not establish why a particular FRN’s margin widened.

Tags

# Discount margin on FRN - widening but bond price increasing?


# Discount margin on FRN - widening but bond price increasing?












Why would a bonds discount margin widen but its price increase? Shouldn't the price be falling when margins are widening?

Looking at the bond pricing formula, if the price is higher doesn't the rate of return have to be lower? What am I missing?

## Answer by Lliane (score 1)

https://quant.stackexchange.com/a/51196

Is it trading below par ? If yes it can converge to par while keeping the same DM.

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