SOFR stands for Secured Overnight Financing Rate. It measures the cost of overnight borrowing collateralized by U.S. Treasuries and is derived from the repo market; the rate is published daily by the Federal Reserve Bank of New York.
In fixed income contexts, SOFR often serves as the reference rate for floating rate instruments and for derivatives. Floating rate notes and some securitizations may specify coupons as SOFR plus a spread, with resets occurring on a daily or compounding basis. Because SOFR is an overnight rate, some structures implement compounding in arrears or lookback periods to determine the coupon for a given period rather than using a single daily rate.
Derivatives such as interest rate swaps and futures use SOFR as the floating leg. Overnight indexed swaps and other SOFR based instruments link payments to the compounded average of SOFR over the relevant period, providing a way to hedge or gain exposure to short term rate movements.
SOFR is part of the transition away from USD LIBOR, and market participants may reference either overnight SOFR or SOFR based term constructs depending on contract terms. Context is affected by day count conventions and market conventions for resets, compounding, and settlement.
A floating rate note might pay a coupon described as SOFR plus 0.25% with monthly resets, using a specified lookback period to determine the coupon for each period.
LIBOR · SOFR Term Rate · Floating-rate note (FRN) · Interest rate swap (IRS) · Overnight index swap (OIS) · Compounded in arrears