Lesson 18 of 25 · 6 min

A spread revision rather than an index reset

A spread revision uses the same four-factor product as an index reset, and the statement does not say which it was.

On the sample, 12 March is an index move: 5.12 percent becomes 5.37 percent, the spread stays 1.85, and the rate becomes 7.22 percent. Invent the other cause. The index stays at 5.12 percent. The spread is revised from 1.85 percent to 2.35 percent on the same date. The rate becomes 7.47 percent. The four-factor shape does not change. Period 1 is still $3,934.07. Period 2 is a different product.

$1,847,220 × 0.0747 × 20 ÷ 360 = $7,665.9630, which prints as $7,665.96. The month totals $3,934.07 + $7,665.96 = $11,600.03. Against the sample's $11,343.47 that is $256.56 more, which is 25 basis points for twenty days — the extra half-point of spread versus the extra quarter-point of index, compared with each other. Against a flat 6.97 percent March of $11,086.91 the spread revision costs $513.12, and $1,847,220 × 0.0050 × 20 ÷ 360 = $513.1166…, which prints as $513.12.

A statement that prints two interest lines and a closing rate of 7.47 percent does not, by itself, name the cause. Index plus spread is a sum. Either addend can be the one that moved. Reconstructing the products verifies the sum that was charged. It does not recover which addend changed unless a rate schedule or a notice sits beside the page.

The operational difference is only in what might move next. An index move is a market object and can move again without a lender decision. A spread revision is a pricing decision and sits still until the next decision. The March arithmetic is silent on that distinction. Two legs appear either way.

Key terms

Spread revision: A change in the lender's add-on, with the index held fixed. It produces a new rate and a new leg, identical in shape to an index reset.
Index reset: A change in the published index, with the spread held fixed. The sample's 12 March event.
Closing rate as a sum: Index plus spread. A printed 7.47 percent does not disclose which addend produced it.

Worked example

Same date, different addend

12 March revision. Index held at 5.12 percent. Spread from 1.85 percent to 2.35 percent. Balance flat at $1,847,220.

New rate: 7.47%
Period 1, unchanged: $3,934.07
Period 2 at 7.47%: $7,665.96
Month under the spread revision: $11,600.03
Sample month under the index reset: $11,343.47
Extra against a flat 6.97% March: $513.12

The products change because the rate input changed. The page does not say whether the index or the spread supplied that change.

Check yourself

Period 2 prints $7,665.96 on $1,847,220 for 20 days, Act/360. What rate does that imply, and does the product tell you whether the index or the spread moved?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.