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Discount Margin


The flat yield spread that is required to reprice a floating rate security (floater, floating-rate bond, etc.) to par. It is often used to quote the credit spread of a floater. In concept, it is very similar to the par floater spread except that it is based on a calculation assuming a flat LIBOR curve. Furthermore, it doesn’t take into account the shape of the term structure of the LIBOR curve on the discounting of future cash flows.

In general, the discount margin represents the average spread or margin over a reference rate the investor expects to receive over the underlying bond’s life based on an assumption of the reference rate evolvement up until maturity date. This assumption usually states that the future levels of the reference rate will be equal to today’s level.

For a bond trading at par, the discount margin equals the par floater spread.



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