medium · Debt Capital Markets bond-instruments-structures
When using SOFR in a credit agreement, why is an 'Observation Lag' or 'Lookback' period used?
- To convert the floating overnight rate into a fixed-rate bond
- To allow the bank time to calculate and invoice the interest payment
- To make certain the borrower ends up paying a lower interest rate
- To wait for the Fed to formally verify each day's underlying transactions
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