Perpetuity and SOFR: Difference between pages

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imported>Doug Williamson
(Added additional broader definition. Source http://www.investopedia.com/terms/p/perpetuity.asp.)
 
imported>Doug Williamson
(Add link.)
 
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1.
''US interest rate benchmarks''.


An infinite amount of time, usually a constant stream of cash flows with no end.
SOFR is the Secured Overnight Financing Rate.  


This is a broad treasuries repo financing rate, recommended as a benchmark by the Alternative Reverence Rates Committee (ARRC) of the Federal Reserve.


It is published by the New York Fed at approximately 8am local time.


2. '''Fixed perpetuities'''


A fixed perpetuity is a periodic cash flow starting one period in the future, then carrying on for ever - ‘in perpetuity’.  
3 April 2018 was the first time SOFR was published. It is calculated based on actual transactions and is a volume-weighted median.  


Each cash flow is an equal fixed amount.
In the first three months of the publication of SOFR the underlying overnight lending transaction volume was on average approximately USD 800 billion.  


The present value of a fixed perpetuity is calculated - assuming a constant periodic cost of capital (r) for all periods from now to infinity - as:


Present Value = A<sub>1</sub> x 1/r
LIBOR, which is currently used as the main benchmark rate, is expected to discontinue by 2021 in light of multiple irregularities and lack of sustainability in the absence of an active underlying market.


SOFR is the new benchmark USD rate (alternatively known as risk-free rate) and ARRC is working with the industry to transition to SOFR from LIBOR.   


where:


A<sub>1</sub> = Time 1 cash flow
==See also==
*[[Alternative Reference Rates Committee]]
*[[Federal Reserve]]
*[[IBOR]]
*[[LIBOR]]
*[[Reference rate]]
*[[Risk-free rates]]
*[[Repo]]
*[[SOFR term rate]]
*[[SONIA]]
*[[Treasury]]


r = periodic cost of capital


===Other links===


3. '''Growing perpetuities'''
[[Media:Slaughter and May interest rate benchmarks.pdf| 2021: A Benchmark Odyssey, Practical Guidance for Treasurers on interest rate benchmarks, Slaughter and May]]


For a growing perpetuity, the present value formula is modified to take account of the constant periodic growth rate from one period in the future to infinity, as follows:
[[Category:Corporate_financial_management]]
 
Present Value = A<sub>1</sub> x 1 / (r - g)
 
where g = the periodic rate of growth of the cash flow.
 
 
The growing perpetuity concept is applied in many contexts.
 
For example, the Dividend growth model for share valuation.
 
 
== See also ==
* [[Annuity]]
* [[Dividend growth model]]
* [[Growing perpetuity]]
* [[Irredeemable]]
* [[Perpetuity due]]
* [[Perpetuity factor]]
* [[Simple annuity]]
* [[Growing annuity]]
 
[[Category:Corporate_finance]]
[[Category:Long_term_funding]]

Revision as of 08:04, 12 September 2021

US interest rate benchmarks.

SOFR is the Secured Overnight Financing Rate.

This is a broad treasuries repo financing rate, recommended as a benchmark by the Alternative Reverence Rates Committee (ARRC) of the Federal Reserve.

It is published by the New York Fed at approximately 8am local time.


3 April 2018 was the first time SOFR was published. It is calculated based on actual transactions and is a volume-weighted median.

In the first three months of the publication of SOFR the underlying overnight lending transaction volume was on average approximately USD 800 billion.


LIBOR, which is currently used as the main benchmark rate, is expected to discontinue by 2021 in light of multiple irregularities and lack of sustainability in the absence of an active underlying market.

SOFR is the new benchmark USD rate (alternatively known as risk-free rate) and ARRC is working with the industry to transition to SOFR from LIBOR.


See also


Other links

2021: A Benchmark Odyssey, Practical Guidance for Treasurers on interest rate benchmarks, Slaughter and May

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