Understanding the SOFR Rate Calculator
The Secured Overnight Financing Rate (SOFR) is the benchmark interest rate for dollar-denominated derivatives and loans, replacing the legacy LIBOR rate. Unlike LIBOR, which was based on bank estimates, SOFR is based on actual transactions in the Treasury repurchase market, making it a "risk-free" rate.
This calculator helps borrowers, lenders, and financial analysts estimate the interest payable on a floating-rate loan tied to SOFR. Commercial loans typically calculate interest by taking the daily SOFR rate and adding a credit spread (margin) determined by the borrower's creditworthiness.
How to Calculate SOFR Interest
The formula for calculating interest on a SOFR-linked loan typically follows the "Simple Interest" method over a specific accrual period. The standard convention for USD loans is Actual/360, though some jurisdictions or specific bond agreements may use Actual/365.
The core calculation steps used in this tool are:
- All-In Rate: The sum of the benchmark SOFR rate and your specific Credit Spread.
Formula: SOFR % + Spread % - Daily Accrual: The interest accumulating on the principal every single day.
Formula: (Notional × All-In Rate) / Day Count Basis - Total Interest Due: The accumulated interest over the specified period.
Formula: Daily Accrual × Number of Days
Why use Actual/360?
In the US money markets, interest rates are traditionally quoted on a 360-day year basis. This means the yearly interest rate is divided by 360 to find the daily factor, but interest accrues for the actual number of calendar days in the period. This results in slightly higher interest payments compared to an Actual/365 basis used in markets like the UK (for SONIA).
Example Calculation
If you borrow $1,000,000 at a SOFR rate of 5.30% with a spread of 2.00% for 30 days using an Actual/360 convention:
- Total Rate: 5.30% + 2.00% = 7.30%
- Calculation: $1,000,000 × 0.0730 × (30 / 360)
- Interest Payable: $6,083.33