Commonly, it is the additional amount (spread) that the issuer of a debt instrument (such a bond or a floater) agrees to pay above the reference rate. It could also be a specific amount less than the reference rate. For example, the coupon rate on a floating-rate bond at the reset date is typically calculated using the following formula:
Coupon rate= reference rate + quoted margin
The quoted margin is expressed in terms of basis points. It can be:
- a positive value: e.g. coupon rate= reference rate + 100 basis points.
- a negative value: e.g. coupon rate = reference rate – 70 basis points.
- zero: and hence, coupon rate= reference rate.
In case the quoted margin is zero, the reference rate is said to be “flat” (e.g. a 3-month LIBOR flat means the coupon rate equals 3-month LIBOR and no quoted margin is added or subtracted.
The quoted margin is usually set depending on market conditions.
