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Note that when SOFR starts to fluctuate, you wont know your actual interest payment before the end of each payment period, since these rates are applied on a da
by codebolt 5y ago
Note that when SOFR starts to fluctuate, you wont know your actual interest payment before the end of each payment period, since these rates are applied on a daily basis, in arrears.
- riskneutral 5y agoCME Term SOFR contracts exist to address this. 1M, 3M, 6M, and 1Y Term SOFR rates are published [1]. A typical 3M LIBOR contract can just substitute it with 3M SOFR without impacting the basic mechanisms, like knowing in advance how much interest you will owe over the next period. [1] https://www.cmegroup.com/market-data/cme-group-benchmark-administration/term-sofr.html# https://www.cmegroup.com/market-data/cme-group-benchmark-adm...
- bzbarsky 5y agoThat's not how mortgages work, at least in the US. There's a limit to how often the rate changes, etc. Just looking at one now, and it's set up as follows: 1. Rate is allowed to change only on the 1st day of every 6th month (after the initial flat-rate period ends). 2. On that day, the new rate is set to a spread + the max of 0 and the value of the 30-day Average SOFR Index (as published by the NY Fed) as of 45 days before the day when the rate is changing. Nothing being applied on the daily basis here.