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Basic question: I am a bit curious what are the differences between Fed Fund Rate, OIS and SOFR? All three, as I understand are based on overnight collateralized transactions? (Please correct if I am wrong) And how is 10y SOFR rate calculated as SOFR is based on overnight rate only? Is it simple compounding?

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    $\begingroup$ OIS can be FF or SOFR for USD, or ESTR or EONIA for EUR (kind of like apples and oranges are fruits). 10yr SOFR is a Fixed float swap, where float leg is the SOFR index. FF are uncollateralized, whereas SOFR is secured. $\endgroup$
    – AKdemy
    Commented Feb 22, 2022 at 17:19
  • $\begingroup$ Thanks @AKdemy I did not understand the part ''10yr SOFR is Fixed float swap, where float leg is the SOFR index''. SOFR is overnight financing rate which I understand is for 1 day, in that case how can we have long term SOFR rates? $\endgroup$
    – Ussu20
    Commented Feb 23, 2022 at 4:34
  • $\begingroup$ Are you familiar with interest rate swaps in general? It is in essence identical to Libor / Euribor. If you have 3m Libor you still have swaps where the maturity date is in a few years. For SOFR, you have a fixed leg, and a float leg, where the float leg pays SOFR, usually annually, but resets daily. $\endgroup$
    – AKdemy
    Commented Feb 23, 2022 at 16:58
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    $\begingroup$ I think what the OP is missing is the concept of compounding the daily rates: you're right in saying that SOFR is a 1-day rate. But essentially, for the purposes of this OIS contract, it is "stretched" out by compounding the 250 or so daily rates in order to get an "average" rate of SOFR after 1 year, which is then exchanged versus the fixed coupon of the swap, just like LIBOR was. $\endgroup$
    – KevinT
    Commented Feb 23, 2022 at 19:24

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The Fed Funds Effective Rate is the overnight unsecured borrowing rate between financial institutions. It is published on Boomberg's FEDL01 page.

SOFR is an overnight interest rate which represents the average rate for overnight Treasury repo transactions (ie secured loans backed by Treasury collateral).

OIS is a style of interest rate swap. It stands for Overnight Indexed Swap. An OIS has a fixed rate on one leg and an overnight rate, reset daily and compounded daily until the payment date, on the floating side. The overnight rate could be either Fed Funds or SOFR or a different rate. Possible confusion arises because up until the invention of SOFR, an OIS was assumed to refer to Fed Funds. But in fact it could be either.

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    $\begingroup$ In the context of the "Federal Funds Effective Rate," the term "effective" indicates the actual interest rate at which banks and depository institutions have conducted Federal Funds transactions on a given day. It represents the real, prevailing interest rate in the market, as opposed to a target or nominal rate set by the Federal Reserve. $\endgroup$ Commented Nov 5, 2023 at 21:28

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