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The difference between a financing rate and a specified benchmark or comparison rate.
A floating-rate contract may specify a reference rate plus a margin expressed in basis points. Changes in the reference rate and changes in the spread can move independently. The spread can reflect credit risk, collateral, maturity, funding costs and competition. Other fees may sit outside it, so the spread is not always a complete measure of the financing's all-in cost.
Suppose the reference rate is 4% and a loan charges another 150 basis points, or 1.5 percentage points. The simplified annual rate is 5.5%. If the reference falls to 3.5% but the spread rises to 200 basis points, the rate is still 5.5%. The wider spread and lower reference have offset each other; “spreads rose” does not alone establish a higher final rate.
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