Discount Margin (DM)
Candlefocus EditorThis calculation enables investors to assess the current value of bonds with regularly-paying coupons by determining the difference in yield between the security and its benchmark. It helps investors understand the exact return they would achieve if they decide to invest in that particular bond.
The discount margin is an important tool for investors to evaluate the overall credit quality of a bond. It also serves as an indication of the bond market’s sentiment towards the issuer, thereby providing an insight into how risky the bond market considers the bond to be.
Bonds are delinquent when their discounted cash flows are lower than the current market price, which is known as negative yield spread or a “negative discount margin”. A negative discount margin suggests that the bond is selling for more than the future coupon payments it is expected to generate over its remaining life.
It is important to consider that the discount margin is only one measure of a bond’s credit quality. Other such criteria include assessing the issuer’s ratings and any other factors that might affect the bond’s performance in the long run.
In conclusion, the discount margin is an important metric that helps investors determine the expected return and assess the current creditworthiness of a variable-rate security such as a bond. Additionally, it provides investors with insight into the current sentiment of the bond market towards the issuer. Investors should exercise due diligence and look at other criteria in addition to the discount margin when assessing the creditworthiness of a bond.