Question

What are the differences between LIBOR (London Inter Bank Offered Rate) and SOFR (Secured Overnight Financing Rate) ? Why SOFR is safer and more preffered one ?  

Answer 1

The most significance difference between LIBOR and SOFR is that LIBOR is an unsecured rate and represents banks' estimates as to their cost of funds.SOFR meanwhile is a secured,risk free rate.Thus LIBOR arguably reflects bank's costs of funding more accurately than SOFR.On the other hand,the calculation of LIBOR was opaque,based on polling of certain banks.The calculation of SOFR is more trasparent,based on market data.

SOFR is seen as preferable to LIBOR since it is based on data from observable transactions rather than on estimated borrowing rates as is sometimes the case with LIBOR.Higher volume generally makes SOFR from manipulation than LIBOR .SOFR is based on data from far more trades than is LIBOR,ideally making it a more accurate measure of the cost of credit.