Reference rate
The published rate a floating coupon resets to, before the fixed margin is added.
Where you will meet it
Reference rate appears in 7 learning outcomes on the CFA syllabus. A few of them:
- Set out coupon designs that do not pay a fixed rate
“A floating-rate note pays a reference rate plus a quoted margin, resetting periodically, so its price stays near par and its interest rate risk is confined to the short period until the next reset.”
- Explain how the rate on an interest rate forward contract is fixed
“The settlement payment is the rate difference on notional for the period, discounted at the reference rate.”
- Explain what the swap rate curve is, and the reasons and ways that market participants rely on it when valuing instruments
“The swap rate curve plots the fixed rates at which dealers swap fixed payments for a floating reference rate across maturities.”
- Explain how the Black model values European swaptions and European interest rate options
“A caplet, a call on a future reference rate, is worth c = notional × accrual fraction × discount factor to the payment date × [FRA × N(d1) − X × N(d2)], paid one period after the rate is set.”
Practise it
Practise reference rate until it is automatic: questions that explain every wrong option.
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