FRN CALCULATIONS

Simple margin

Simple margin is the average return on an FRN for its life compared to the reference interest rate. It is composed of two elements, the margin (i.e. the difference between the actual coupon rate and the benchmark interest rate), and the capital gain or loss that will be made when the bond matures (i.e. the difference between the cost price and the maturity value of the bond). The formula may be expressed as:

This formula amortises the element of capital gain or loss in a straight line over the remaining period to maturity, rather than at a constantly compounding rate. To achieve this, the discounted margin concept may be used. However, this method relies on a forecast of the benchmark interest rate over the life of the bond.