what is a discount margin dm 
a discount margin dm is the average expected return of a floating rate security typically a bond that s earned in addition to the index underlying or reference rate of the security the size of the discount margin depends on the price of the floating or variable rate security the return of floating rate securities changes over time so the discount margin is an estimate based on the security s expected pattern between issue and maturity another way to view the discount margin is to think of it as the spread that when added to the bond s current reference rate will equate the bond s cash flows to its current price understanding a discount margin dmbonds and other securities with variable interest rates are usually priced close to their par value 1 this is because the interest rate coupon on a variable rate bond adjusts to current interest rates based on changes in the bond s reference rate 2 a security s yield relative to the yield of its benchmark is called a spread and different types of yield spread calculations exist for the different pricing benchmarks the discount margin is one of the most common calculations it estimates the security s spread above the reference index that equates the present value of all expected future cash flows to the current market price of the floating rate note there are three basic situations involving a discount margin calculating the discount margin dmthe discount margin formula is a complicated equation that takes into account the time value of money and typically needs a financial spreadsheet or calculator to calculate accurately there are seven variables involved in the formula they are all coupon payments are unknown with the exception of the first and must be estimated in order to calculate the discount margin the formula which must be solved by iteration to find dm is as follows the current price p equals the summation of the following fraction for all time periods from the beginning time period to maturity numerator c i denominator 1 i 1 dm 100 x d 1 d s 360 x product i j 2 1 i j dm 100 x d j 360 