Definition
For a floating-rate instrument, each future coupon resets off a reference rate, so price is driven by the margin demanded above that rate rather than by a single fixed yield. The discount margin is the constant spread that, layered on the projected reference-rate path, discounts the expected cashflows back to the price. It is distinct from the contractual spread, which is the fixed margin written into the loan and does not move once set; the discount margin is a valuation output that moves with price and credit. It is also distinct from yield, which on a fixed-rate instrument is a single all-in discount rate rather than a spread over a floating base. In a private credit mark the discount margin is the lever that carries credit quality and market spread into the price: widen it and the mark falls, tighten it and the mark rises.
Why it matters in private credit valuation
- On a floating-rate loan the mark is set by the margin demanded over the reference rate, so the discount margin — not a fixed yield — is the variable that moves the valuation.
- Separating the discount margin from the contractual spread keeps fact apart from judgement: the contractual spread is documented, the discount margin is the assumption a committee can challenge.
Related
Glossary terms
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