held to maturity, so the markets aren't as liquid. In the wholesale markets, FRNs are typically quoted as a spread over the reference rate. Example Suppose a new 5 year FRN pays a coupon of 3 months LIBOR +0.20%, and is issued at par (100.00). If the perception of the credit-worthiness of the issuer goes down, investors will demand a higher interest rate, say LIBOR +0.25%. If a trade is agreed, the price is calculated. In this example, LIBOR +0.25% would be roughly equivalent to a price of 99.75. This can be calculated as par, minus the difference between the coupon and the price that was agreed (0.05%), multiplied by the maturity (5 year). Yield measures Metrics such as yield to maturity and internal rate of return cannot be used to estimate the potential return from a floating rate note. That is the case because it is impossible to forecast the stream of coupon payments with accuracy, since they are tied to a benchmark that is constantly subject to change. Instead, metrics known as the effective spread and the simple margin can be used. Effective spread The effective spread is the average margin over the benchmark rate that is expected to be earned over the life of the security. For a floating rate note selling at par value, the effective margin is merely the contractual spread over the benchmark rate specified in the note's prospectus. For notes that sell at a discount or premium, finance scholar Dr. Frank Fabozzi outlines a present value approach: project the future coupon cash flows assuming that the benchmark rate does not change and find the discount rate that makes the present value of the future cash flows equal to the market price of the note. That discount rate is the effective spread. This approach takes into account the premium or discount to par value and the time value of money, but suffers from the simplifying assumption that holds the benchmark rate at a single value for the life of the note. Simple margin A simpler approach begins with computing the sum of the quoted spread of the FRN and the capital gain (or loss) an investor will earn if the note is held to maturity: Second, adjust the above for the fact that the note is bought at a discount or premium to the nominal value: See also Fixed rate bond Structured note Equity-linked