Loan Parameters

bps
Credit spread over SOFR
%
Current benchmark rate
%
Minimum benchmark rate
% of par
Original issue discount
% of par
Secondary market price
years
Expected time to repayment
%
Investor upfront fee
All-In Yield Formula
All-In Yield = SOFReff + Spread + OID/Life + Fee/Life
SOFReff = max(SOFR, Floor) | OID = 100 - Issue Price
Ryan O'Connell, CFA
Calculator by Ryan O'Connell, CFA

Yield Analysis

Secondary Market Yield (Approx.) 9.50% Typical Spread
Floor Inactive
Effective SOFR 5.00%
Coupon Rate 9.00%
Current Price Pickup +50 bps
Issue Economics (Primary Investor)
OID Amort. 33 bps
Fee Amort. 33 bps
All-In Spread 466 bps
All-In Yield 9.66%

Formula Breakdown

Spread Interpretation

All-In Spread Interpretation Typical Segment
< 500 bps Tighter Spread Stronger credit, first-lien
500 - 700 bps Typical Spread Standard leveraged loan
> 700 bps Wide Spread Higher risk / stressed
Model Assumptions
  • Linear amortization of OID and fees over average life (simplified)
  • SOFR floor applies at each reset (standard for leveraged loans)
  • Constant SOFR assumed over loan life
  • No prepayment penalty or call premium
  • Secondary yield = Coupon + Price Pickup (excludes issue OID/fees)

For educational purposes. Not financial advice. Yields are approximations.

Understanding Leveraged Loan Yields

What is a Leveraged Loan?

Leveraged loans are floating-rate senior secured loans made to companies with significant debt levels, typically rated below investment grade. They are used to finance leveraged buyouts (LBOs), acquisitions, and corporate refinancing. Unlike bonds, leveraged loans are secured by company assets and sit senior in the capital structure.

All-In Yield Approximation
Issue Yield: Effective SOFR + Spread + OID/Life + Fee/Life
Secondary Yield: Coupon Rate + (100 - Current Price)/Life
Linear approximation over expected average life

SOFR Floors

Most leveraged loans include a SOFR floor that sets a minimum benchmark rate for coupon calculations. If the floor is 1.00% and actual SOFR drops to 0.50%, the loan coupon uses 1.00% as the effective rate. This protects lenders from extremely low rate environments while borrowers benefit when rates are above the floor.

Original Issue Discount (OID)

OID represents additional yield for investors when loans are issued below par. A loan issued at 99 has 1 point of OID, which is amortized over the expected average life to calculate the annualized yield pickup. For a 3-year average life, 1 point OID adds approximately 33 basis points to the all-in yield.

Primary Market

Issue Economics
Original investor receives OID pickup and upfront fee, amortized over expected life.

Secondary Market

Current Price Pickup
Secondary buyer captures discount from current price to par, without original OID/fees.

Key Difference: A secondary buyer at 98.50 captures the pickup from 98.50 to par, not the original OID from 99. The all-in yield calculation differs between primary and secondary investors.

Frequently Asked Questions

A leveraged loan spread is the contractual credit margin over a benchmark rate (typically SOFR) that compensates lenders for credit risk. For example, a loan priced at SOFR + 400 bps has a 400 basis point spread. Leveraged loans are floating-rate instruments used to finance leveraged buyouts, acquisitions, and corporate refinancing.

A SOFR floor sets a minimum benchmark rate for coupon calculations, protecting lenders when market rates fall below the floor. If the floor is 1.00% and actual SOFR is 0.50%, the coupon uses 1.00% as the effective SOFR. This ensures lenders receive a minimum yield regardless of how low benchmark rates drop.

Original Issue Discount (OID) is the difference between par value (100) and the issue price. If a loan is issued at 99, the 1-point OID represents additional yield for the original investor. OID is typically amortized over the loan's expected average life to calculate the annualized yield pickup.

The approximate all-in yield combines the effective benchmark rate (SOFR with floor), credit spread, amortized OID, and amortized upfront fees. The formula is: All-In Yield = Effective SOFR + Stated Spread + (OID / Average Life) + (Upfront Fee / Average Life). This is a simplified linear approximation, not a full discounted cash flow yield calculation.

Stated spread is just the contractual credit margin over SOFR (e.g., 400 bps). All-in spread adds the annualized value of OID and upfront fees to the stated spread. For example, with 400 bps stated spread, 33 bps OID amortization, and 33 bps fee amortization, the all-in spread is 466 bps.

Secondary market discounts typically reflect credit deterioration, increased default expectations, liquidity or technical selling pressure, sector-specific risks, or repricing risk. Since leveraged loans are floating-rate instruments, benchmark rate changes have less impact on prices compared to fixed-rate bonds.
Disclaimer

This calculator provides simplified yield approximations using linear amortization over expected average life. Actual loan yields depend on prepayment timing, SOFR resets, and other factors not captured in this model. This tool is for educational purposes only and should not be used for investment decisions.

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