medium · Debt Capital Markets
In the context of the LIBOR-to-SOFR transition, why is 'compounding in arrears' necessary for floating-rate notes referencing SOFR?
- SOFR embeds a significant bank credit risk premium
- Compounding in arrears prevents the issuer from calling the bond
- SOFR is an overnight rate with no inherent term structure
- It allows the coupon to be known at the start of the period
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