CFA Latest CFA Level 2 Discussions Discount margin to value risky floater

Discount margin to value risky floater

  • This topic has 3 replies, 2 voices, and was last updated Jan-21 by fp92.
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    • SbS
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      We add discount margin to all nodes of binomial interest rate tree to arrive at market value of risky floater.

      Suppose we apply same analogy to fixed coupon bond and add constant spread to all nodes of binomial interest rate tree to arrive at market value of fixed coupon bond. Then in this case what would be the constant spread called?Is there any name to this spread?

    • fp92
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      Credit spread. It contains many components priced in for, e.g. liquidity risk, default risk etc. I found this article quite interesting in detailing the study on it (https://blogs.cfainstitute.org/investor/2012/04/03/components-of-credit-spreads-and-their-importance/)

    • SbS
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      I calculated credit spread using CVA and added this across all nodes of Binomial interest rate tree. But this doesn’t reflect market price of risky bond.

      Credit spread is ideally calculated on comparable benchmark bond YTM. But we are adding spread to forward rates of binomial tree here.

      So I don’t believe it is credit spread.

    • fp92
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      I don’t follow what you’re on about, sorry.

      Do you have a question/example you’re working on?

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