The margin (spread) that is demanded by the market on a debt instrument (such as a bond, floater, etc). For example, suppose a floater has a coupon rate of one-month LIBOR plus 50 basis points. If market conditions change to the effect that the required margin increases to 65 basis points, the floater would be offering a below-market quoted margin. Consequently, the floater’s price will drop below par value. If, on the contrary, the required margin is lower than the quoted margin (less than 50 basis points in our example), the floater’s price will decline below par value.
The required margin for a given issue depends on a set of factors:
- The credit quality of the issue or instrument (credit spread).
- The comparable margin prevailing in funding markets.
- The liquidity of the issuer or instrument (liquidity spread).
- The embedded optionality associated with the issue (call options or put options).
