Effective Margin Financial Glossary

What is it? The effective margin is the average spread over the underlying index that the investor expects to earn over the life of a floating-rate security. For a floating-rate security selling at its par line, the effective margin is identical to the spread between the coupon rate and the underlying index. An advantage of using an effective margin measurement is that it applies equally well to floating-rate securities trading at discounts, at par, or at premiums. A security trading at a discount will have an effective margin greater than the difference between the coupon rate and the index.

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