Finance
What Is SOFR (Secured Overnight Financing Rate)?

Other alternatives to SOFR include the Effective Federal Funds Rate (EFFR), the Prime Rate, the Treasury Bill Rate, and the Constant Maturity Treasury (CMT) rate. Each of these alternative rates has its own characteristics and may be more suitable for specific types of lending products or financial institutions.
Understanding Benchmark Rates in Financing
When considering financing options, it’s essential to understand the benchmark rates that lenders use to determine interest rates. While some lenders may not consider certain benchmark rates, depending on the financing type, there are several commonly utilized ones to be aware of.
Key Benchmark Rates
Some benchmark rates that lenders often refer to include:
- Prime Rate: Published by the Wall Street Journal (WSJ), the Prime Rate is a widely used benchmark rate for well-qualified borrowers.
- Federal Funds Rate (FFR): Set by the Federal Open Market Committee (FOMC), the FFR represents the interest rate at which US banks lend to each other overnight.
- American Interbank Offered Rate (AMERIBOR): Determined by The American Financial Exchange (AFX), AMERIBOR reflects the true cost of short-term interbank borrowing.
Frequently Asked Questions (FAQs)
Is SOFR and the FFR the same?
No, SOFR (Secured Overnight Financing Rate) and the FFR differ in terms of collateral and calculation methods. SOFR uses US Treasury securities as collateral, while the FFR involves uncollateralized lending between banks.
What is the difference between SOFR and LIBOR?
SOFR and LIBOR vary in calculation methods and risk levels. SOFR is based on actual market transactions, while LIBOR relies on estimated borrowing costs. Moreover, SOFR is considered less risky as it involves collateralized loans, unlike LIBOR which involved unsecured loans.
Is SOFR more reliable than LIBOR?
Yes, SOFR is deemed more reliable than LIBOR due to its transparency and basis on actual market transactions. This minimizes the potential for manipulation, which was a concern with LIBOR’s reliance on estimated borrowing costs.
Bottom Line
SOFR is a prevalent benchmark rate used by lenders to price lending products, updated daily, and replacing LIBOR in 2023. It plays a vital role in enhancing transparency and modernizing benchmark interest rates to prevent manipulative practices.
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