Lesson 8 of 25 · 7 min

Daily reset against monthly reset, on the same rate path

Cadence does not make a facility dearer; it makes it late, and lateness is a saving in one direction only.

Lesson 7 compared quarterly against monthly on a rising path. Pushing the comparison to its limit — daily against monthly, on one path, run in both directions — shows that cadence has no cost of its own at all.

Take a 92-day quarter in which the index rises exactly one basis point a day, from 4.55 to 5.46 percent. The spread is 2.10 percent, the balance is flat at $1,480,000, and the basis is Act/360. A daily reset charges each day at that day's rate, totalling $26,872.69. A monthly reset observes on the first day of each month and holds: 6.65 percent for 31 days, 6.96 for 30, 7.26 for 31, totalling $26,311.52. The daily facility paid $561.17 more.

Now reverse the path. The same ninety-two daily rates in the opposite order, falling one basis point a day from 5.46 to 4.55. The daily total is unchanged at $26,872.69, because it is the same set of numbers summed in a different sequence. The monthly total becomes $27,433.86, and now the monthly facility pays $561.17 more. The figure is identical and the sign has flipped.

That symmetry is the lesson. Cadence is not a charge; it is a lag, and a lag is worth exactly the average distance between the frozen rate and the live one, signed by the direction of travel. Nobody is collecting the $561.17. It appears on one side or the other depending on which way the cycle happened to run.

For a pledged portfolio the two directions are not equivalent, even though the arithmetic is. A tightening is the environment in which collateral values are already under pressure, so a slow cadence helps in the period when headroom is scarce, and hurts in the period when headroom is recovering anyway. Symmetric in dollars, asymmetric in consequence.

Key terms

Daily reset: A facility that recomputes the rate every day, so the charge tracks the index with no lag at all.
Rate path: The sequence of rates across a period, as opposed to the start and end levels. Two paths with identical endpoints can cost different amounts.
Lag value: What a reset delay is worth, equal to the average distance between the frozen rate and the live one over the period.

Worked example

The same ninety-two days, run both ways

An index moving one basis point a day across a 92-day quarter. Spread 2.10%, balance $1,480,000, Act/360.

Rising path, daily reset: $26,872.69
Rising path, monthly reset: $26,311.52
Daily less monthly, rising: +$561.17
Falling path, daily reset: $26,872.69
Falling path, monthly reset: $27,433.86
Daily less monthly, falling: −$561.17

The cadence was worth $561.17 in both directions. A reset frequency is not a price; it is a position on the rate path, and positions pay out according to which way the path went.

Check yourself

The index is flat at 4.88 percent for an entire 91-day quarter. The spread is 1.75 percent and the balance is $2,240,000, Act/360. What is the difference between a daily reset and a monthly one, and what is the interest?

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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.