# Benchmark rates, loan coupons and the interest actually paid

Canonical: https://commercialdebtadvisory.com/references/benchmark-rates-and-loan-coupons/
Status: Published
Publisher: Jaken Finance Group

A loan described as “SOFR plus a spread” is not sufficiently defined to calculate a payment. You also need the precise benchmark version, observation or reset date, floor, spread, funded principal, accrual period and day-count convention. Two quotations with the same stated spread can produce different coupons or cash costs.

This reference separates those inputs and shows their arithmetic. Every rate in the worked examples is hypothetical. The page does not display a live benchmark, a lender quote or an estimate of financing currently available to a particular borrower.

## Name the benchmark precisely

The [New York Fed describes SOFR](https://www.newyorkfed.org/markets/reference-rates/sofr) as a broad measure of overnight borrowing costs secured by Treasury securities. That overnight observation is different from the bank’s [SOFR Averages](https://www.newyorkfed.org/markets/reference-rates/sofr-averages-and-index), which compound overnight observations over rolling 30-, 90- and 180-day periods. Its SOFR Index supports compounded calculations over custom periods.

A contract referring to a term benchmark should identify its administrator, tenor and applicable fixing. Do not substitute a 30-day historical compounded average for a one-month term rate because both sound monthly. Similarly, the policy rate discussed in a news report is not automatically the reference rate in a loan agreement.

Record the benchmark’s exact name and source beside the value used in your model. Add the observation date and the payment period it affects. A rate screenshot without those details is weak support for a payment forecast.

## Translate the benchmark into the coupon

For this example only, assume the contract applies a floor to the index before adding the spread:

**Coupon = max(observed index, index floor) + spread.**

The placement of the floor matters. A floor on the full coupon could produce a different result from an index floor. So could a contractual cap, spread change or fallback provision. Read the defined terms rather than imposing this example’s formula on every loan.

Assume $3 million of outstanding principal, an observed index of 3.80%, a 4.00% index floor and a 2.75% spread. The coupon is 4.00% plus 2.75%, or 6.75%. Adding the observed 3.80% directly to the spread would understate the coupon by 0.20 percentage point, or 20 basis points.

If the observed index later becomes 5.20% under the assumed reset mechanics, the coupon becomes 7.95%. The floor no longer increases the index used in the calculation. Nothing in this example assumes an interest-rate cap or a change in spread.

## Worked payment exhibit: day count changes the dollars

Assume an interest-only payment with constant $3 million principal throughout the period and simple accrual. Under an actual/360 convention, modeled interest equals principal multiplied by annual coupon multiplied by actual days divided by 360.

| Illustrative period | Coupon | Formula | Interest |
|---|---:|---|---:|
| 30 days, actual/360 | 6.75% | $3M × 0.0675 × 30/360 | $16,875.00 |
| 31 days, actual/360 | 6.75% | $3M × 0.0675 × 31/360 | $17,437.50 |
| 30 days, actual/365 | 6.75% | $3M × 0.0675 × 30/365 | $16,643.84 |
| 30 days after modeled reset, actual/360 | 7.95% | $3M × 0.0795 × 30/360 | $19,875.00 |

The 31-day payment is $562.50 larger than the 30-day payment despite an unchanged coupon and balance. The different denominator also changes the result. These calculations are not interchangeable with a compounded-in-arrears calculation or a loan whose balance changes within the period.

The [ARRC’s 2019 User’s Guide to SOFR](https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/Users_Guide_to_SOFR.pdf) explains distinctions between simple and compounded methods and between in-advance and in-arrears conventions. It is methodology background; the current loan documents establish the applicable implementation.

## Separate the payment from the financing cost

A 1% origination fee on the example’s $3 million commitment is $30,000. That fee is additional to the interest above unless the documents specify another treatment. It does not change the stated 6.75% coupon. A fee retained from the advance reduces usable closing cash, while a fee capitalized into principal can affect subsequent interest.

Do not label coupon plus origination percentage as an annual percentage rate. A meaningful effective-cost comparison needs cash-flow timing, outstanding balances, fees, repayment and any relevant exit costs. A one-year hold and a three-year hold spread an upfront fee across different periods.

Likewise, 25 basis points equals 0.25 percentage point, not 25% of the coupon. On a constant $3 million balance, a 25-basis-point difference is $7,500 under a simple one-year calculation. The actual cash difference still depends on accrual and balance timing.

## Reconcile a statement to the contract

For each payment, match the opening balance, advances or repayments, reset observation, applied floor, spread, accrual dates and denominator. Check whether interest compounds or uses simple daily accrual, and whether the benchmark is known at the beginning or determined through the period. Retain the supporting calculation rather than only the final number.

If an interest-rate cap exists, review it separately. The cap’s index, strike, notional and settlement dates may not exactly match the loan. A cap payment is not automatically a reduction of the coupon printed on the lender statement. The documents determine how proceeds are applied.

For a term-sheet comparison, normalize both proposals to the same assumed funding and repayment calendar, then preserve each contract’s own conventions. The resulting cash flows help compare cost; they do not eliminate differences in recourse, extension conditions, liquidity requirements or execution certainty.


## Source references
- [Federal Reserve Bank of New York — SOFR](https://www.newyorkfed.org/markets/reference-rates/sofr) — Benchmark definition · Checked 2026-10-21 · Defines overnight SOFR; not a current CRE loan quote.
- [Federal Reserve Bank of New York — SOFR Averages and Index](https://www.newyorkfed.org/markets/reference-rates/sofr-averages-and-index) — SOFR averages and index definitions · Checked 2026-10-21 · Administrator definitions for compounded SOFR averages and the cumulative index.
- [ARRC — A User’s Guide to SOFR](https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/Users_Guide_to_SOFR.pdf) — Simple versus compound interest and in-advance versus in-arrears conventions, pages 6–8 · Checked 2026-10-21 · Source date / context 2019-04 · Historical methodology explanation; current executed contract controls the loan and no current benchmark value is asserted.