SoA6, Spread Measures

[OT]

SoA6
HBOFIS Ch 14 Floating-Rate Securities
Spread Measures (page 329)
Discount Margin and Spread for Life

Is it me, or can discount margin be calculated without iteration? Assuming no imbedded options, instead of iterating, can’t we just solve for the interest rate that discounts the future cash flows to the security’s price? The discount (premium) margin is then the rate we just calculated minus the reference rate (recall that this method assumes a constant reference rate). But now the method I propose here for Discount Margin seems like how the Spread for Life would be calculated.

FV = Par = $100
PMT = Coupon = $10 (assume annual payments)
PV = price of security = $95
N = number of years or coupon payment periods = 2 (assuming annual coupons and interest)
Using the BA-35 Solar, the solved-for interested rate is 13%
If the reference rate is 8%, then the Discount Margin is 5%.

Any assistance would be greatly appreciated.

[Exam Slave]

Try it for non-powers of 2.

(added)

Oops, I'm dating myself, assuming the beige solar caluclator's shortcomings.

With the BA-35, et al, determining interest rate equivalent is as easy as reading the manual.

<font size=-1>[ This Message was edited by: Exam Slave on 2001-12-18 17:56 ]</font>

[Exam Slave]

As a follow-up: Name the key difficulty to the spread measures discussed.

Also, could you be more precise with the rates, preferable two decimal places?

[OT]

Thank you, ES.

The interest rate I get is 12.997313108.

The key difficulty to spread measures discussed is that they do not recognize the presence of embedded options which would be necessary and difficult to do. Here interest rate dependent models using arbitrage-free binomial interest rate trees and Monte Carlo simulations are used. Okay, I looked but I did know that it was options, generally.