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Funky SOFR, or a plug-and-play? You choose
It is theoretically satisfying to separate a borrowers rate out as separate 1. Risk free, 2. Systemic and 3. Credit components Libor incorporates bank risk. SOFR never will. It is partly the point of SOFR; a risk free rate (the Secured Overnight Financing Rate). Why could this be an issue? Well, it makes sense to deploy a discount rate that reflects the riskiness of the project being financed. So, banks should discount their banks risks using a discount rate that reflects that risk. Such risks are not risk free; they reflect systemic risk. Furthermore, the rate paid by a borrower from a bank then adds an applicable ... (full story)