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Reset

In finance, a reset refers to the process of adjusting the terms or conditions of a financial instrument, such as an interest rate, maturity date, or payment schedule, based on a predefined trigger or schedule. Resets are common in variable-rate loans, bonds, and derivative contracts, where the interest rate or other terms are periodically adjusted to reflect changes in market conditions or benchmark rates.

Example

A variable-rate mortgage with a reset period of one year adjusts its interest rate annually based on changes in the benchmark rate, such as LIBOR or SOFR.

Key points

• The process of adjusting the terms of a financial instrument based on market conditions or a predefined schedule.

• Common in variable-rate loans, bonds, and derivatives.

• Often involves adjusting interest rates or payment schedules.

Quick Answers to Curious Questions

They allow interest rates or other terms to adjust based on market conditions, ensuring that the instrument remains aligned with current economic realities.

Borrowers may face higher or lower payments depending on changes in the benchmark rate during the reset period.

Resets can be triggered by predefined schedules, such as annual or quarterly periods, or by specific market conditions, such as changes in benchmark interest rates.