Floating-rate loans on SOFR
A SOFR loan charges a base rate plus a fixed margin on the outstanding balance for the actual days elapsed over 360. Which SOFR the base rate is, when it is set, and how a floor applies decide the rest.
Interest on a SOFR loan for one interest period is the balance times the all-in rate times actual days divided by 360, where the all-in rate is a SOFR-based base rate, raised to any floor, plus the margin. The base rate is one of three kinds: CME Term SOFR, fixed before the period starts; Daily Simple SOFR, which adds up each day's rate; or daily SOFR compounded in arrears. On a $10 million loan at SOFR + 225 bp for the third quarter of 2026, those choices (plus an in-advance SOFR Average) put the quarter's interest anywhere from $150,355.09 to $151,664.56, worked through below with New York Fed data.
The parts of the rate
Base rate: three ways to turn SOFR into a period rate
SOFR is an overnight rate, published each business day at about 8:00 a.m. ET for the previous business day. A loan with one-, three- or six-month interest periods needs a single rate for each period, and there are three common ways to get one.
- Term SOFR. CME Group's forward-looking 1-, 3-, 6- and 12-month rates, derived from SOFR futures. CME publishes them at 5:00 a.m. CT on day T from data sampled on T−1, for a reference period starting T+2, so the borrower knows the period's rate before the period begins. The ARRC's 2023 scope-of-use update listed "new use in business loans" among the few uses it recommended. Using Term SOFR in pricing requires a CME license, though CME says a borrower does not need one merely for being the borrower; this site does not display its values.
- Daily Simple SOFR. Each day's SOFR accrues simple interest on the balance, and the period's interest is the sum. No interest on interest, so the daily amounts can simply be added up to any date.
- Compounded SOFR in arrears. Each day's interest is reinvested at the next day's rate, the same arithmetic the New York Fed uses for its SOFR Index. The period rate is final only after the last SOFR in the period is published.
A fourth design sets the rate in advance from a published SOFR Average. Regulation ZZ moved some legacy LIBOR contracts of FHFA-regulated entities to 30-day Average SOFR plus a tenor spread adjustment (12 CFR 253.4); the credit spread adjustment guide covers the rule.
Margin
The margin (often "applicable margin") is the lender's credit spread, quoted in basis points and fixed by the agreement. In the examples on this page it is added to the period's SOFR rate after compounding, never compounded itself, and it accrues on the same ACT/360 basis. At 225 bp on $10 million, the margin alone costs $57,500.00 in a 92-day quarter; the choice of base rate moved that quarter by about $1,300.
Floors: on each day's SOFR, or on the period rate
A floor sets a minimum rate, usually for the base rate. With Term SOFR there is one rate per period, so the only question is whether the floor applies to the base rate or to the all-in rate. With a daily rate the agreement has to say whether the floor applies to each day's SOFR before it is summed or compounded, or to the finished period rate, and the two answers differ whenever SOFR crosses the floor inside a period.
The second quarter of 2022 shows the gap. SOFR printed between 0.26% and 0.30% on each of the first 23 business days from April 1, 2022 through May 4, then jumped to 0.79% on May 5, the day a higher federal funds target range took effect. Compounded in arrears without a lookback, April 1 to July 1 (91 days) gives a period rate of 0.70754%, already above a 0.50% floor, so a floor on the period rate never binds. Floor each day's SOFR at 0.50% first and the compounded rate is 0.78691%. At SOFR + 225 bp on $10 million, that is $74,760.04 against $76,766.34: the daily floor cost the borrower $2,006.30 in a quarter when the average rate was comfortably above the floor.
Interest periods, rate setting and notice
Term SOFR loans let the borrower elect a period length that matches a published tenor, typically by notice a set number of business days before the period starts. The rate is then set from the Term SOFR published shortly before the period, and nothing about it changes until the next reset.
Daily-rate loans reset every business day, and the problem is notice in the other direction: the borrower cannot know the period's interest until the period is nearly over. The ARRC's 2021 updated user's guide to SOFR lists payment delays, lookbacks and lockouts as the ways to buy back time, and for business loans it recommended a lookback without an observation shift. Its loan conventions contemplate a five-business-day lookback: each day in the period accrues at the SOFR published for five business days earlier, so the last rate the period needs is published several business days before the payment date. The details of each convention, with numbers, are in compounding-in-arrears conventions.
Weekends and holidays matter as well. A Friday's SOFR applies to Friday, Saturday and Sunday, so it carries three days of weight; in the third quarter of 2026, the SOFR for Thursday, July 2 carried four days because no SOFR was published for Friday, July 3, the Independence Day holiday, and the rate for Friday, September 4 carried four because of Labor Day.
Day count: ACT/360
SOFR loans accrue on actual days over a 360-day year, the same basis the New York Fed uses for the SOFR Averages and Index. A 92-day quarter therefore accrues 92/360 = 0.25556 of the annual rate, not 0.25. On the worked example below, the 5.91517% all-in rate costs $151,165.46 on ACT/360, against $147,879.25 if the same rate were applied on 30/360 (90 days) and $149,094.70 on ACT/365F. Each basis point of base rate in that quarter is worth $255.56 on $10 million. The day count calculator gives the fraction for any pair of dates.
Worked example: $10 million for the third quarter of 2026
Take a $10,000,000 loan at SOFR + 225 bp, no floor, with an interest period from July 1 to October 1, 2026: 92 calendar days and 64 SOFR prints. SOFR ranged from 3.53% (July 9) to 3.90% (September 25, 28 and 30). The quarter contained a policy change: the federal funds target range moved from 3.50%–3.75% to 3.75%–4.00% effective September 17, 2026, and SOFR went from 3.62% on September 16 to 3.85% on September 17.
| Base rate | Known | Base rate | All-in | Quarter's interest |
|---|---|---|---|---|
| CME Term SOFR 3-month | Before July 1 | Not shown (CME license) | — | — |
| 30-day Average SOFR, published July 1 | July 1 | 3.63346% | 5.88346% | $150,355.09 |
| 90-day Average SOFR, published July 1 | July 1 | 3.63493% | 5.88493% | $150,392.66 |
| Daily Simple SOFR, 5-day lookback | September 24 | 3.64848% | 5.89848% | $150,738.93 |
| Compounded SOFR, 5-day lookback | September 24 | 3.66517% | 5.91517% | $151,165.46 |
| Daily Simple SOFR, no lookback | October 1 | 3.66783% | 5.91783% | $151,233.43 |
| Compounded SOFR, no lookback | October 1 | 3.68470% | 5.93470% | $151,664.56 |
How each row is built
With ni the calendar days SOFRi applies and 92 the days in the period:
The compounded rate with no lookback can be checked against the New York Fed's SOFR Index: 1.26099341 on October 1 divided by 1.24923010 on July 1, minus one, times 360/92, gives 3.68470%. The SOFR Index calculator does that division, and the compounded SOFR calculator reproduces the compounded lookback row day by day.
With the five-day lookback, July 1 accrues at the SOFR for June 24 and September 30 accrues at the SOFR for September 23. The higher post-September 17 rates reach the loan only from September 24, so the lookback rows sit about 2 bp below their no-lookback counterparts. Compounding adds 1.67 bp over simple accrual with the lookback ($426.53 for the quarter), a gap that grows with the rate level and the length of the period.
The in-advance rows and the lag
The 30- and 90-day Averages published on July 1 describe SOFR over the 30 and 90 days before that date, and a loan that uses them pays for the third quarter on second-quarter rates. They missed the September move entirely and were the cheapest rows here. The cost moves to the next period. The 90-day Average published October 1, 2026 was 3.68473%, nearly identical to the third quarter's compounded rate of 3.68470%, so a fourth-quarter loan on that average pays the third quarter's level while SOFR prints above it. When rates fall, the same lag works in the borrower's favor.
Hedging basics: swaps and caps
Hedging a SOFR loan means fixing or limiting the base rate; the margin is already fixed. Two instruments do most of the work.
Interest rate swap
In a pay-fixed swap the borrower pays a fixed rate on a notional amount and receives SOFR. SOFR overnight index swaps compound SOFR in arrears and, per the ARRC's user's guide, generally settle two days after the period ends. Suppose the borrower above had a swap at a hypothetical fixed 3.40% on the full $10 million. For the third quarter the swap's floating leg is compounded SOFR with no lookback, 3.68470%, so the borrower receives a net $7,275.67. The loan, on compounded SOFR with a five-day lookback, charged $151,165.46. Net cost: $143,889.79, an effective 5.63047%.
That is the 3.40% fixed rate plus the 2.25% margin, less 1.953 bp. The difference is basis: the loan and the swap observe SOFR over different days. Here it helped the borrower, because rates rose late in the quarter and the swap saw the rise five business days sooner than the loan. In a quarter where rates fall late, it costs. Matching the swap's conventions to the loan's removes it. For Term SOFR loans, the ARRC's scope-of-use recommendations allow Term SOFR derivatives when they are issued to end users to hedge cash products that reference Term SOFR.
Interest rate cap
A cap pays the borrower the amount by which the reference rate exceeds a strike, on the notional, for each period, in exchange for a premium paid to the cap seller. The borrower keeps the benefit of lower rates. What the cap references matters. With a hypothetical 3.75% strike measured on the loan's period rate, the third quarter paid nothing: compounded SOFR with the lookback was 3.66517%, below the strike, even though daily SOFR printed above 3.75% on each of the last 10 business days of the quarter. A cap limits the period rate, not individual days.
Swaps and floors interact badly when SOFR falls below a loan floor that the swap does not share; the rate shock calculator shows that effect, with swaps and caps, across a range of SOFR moves.
What to find in your own agreement
To reproduce a lender's figure, pull these terms from the credit agreement:
- The defined base rate: Term SOFR and its tenor, Daily Simple SOFR, compounded SOFR, or a published average, and any fixed spread adjustment added to it.
- The lookback, lockout or observation shift, in business days, and the payment date relative to the period end.
- The floor, its level, and whether it applies to each day's SOFR, to the period rate or to the all-in rate.
- The day-count basis and the rounding of the rate and of the interest amount.
- Any swap or cap confirmation, and whether its SOFR observation dates match the loan's.
With those terms, the floating-rate loan calculator projects a full payment schedule and the rate shock calculator sizes a year of interest under parallel SOFR moves.