LIBOR, Definition and more...

Monday, September 26, 2011

Definition:
London Interbank Offered Rate (LIBOR, pronounced as “lie-bore”) is the rate at which European banks can borrow funds, in marketable size, from other banks in the London interbank market.

Usage:
It is the rate at which the world's "Most Preferred Borrowers" are able to borrow money.
It is also the rate on which rates for "Less Preferred Borrowers" are based.
e.g. a corporation with a very good credit rating may borrow money for one year at LIBOR plus four points.

It is also used as benchmark rate for financial instruments.
e.g. forward rate agreements, short term interest rate futures contract, interest rate or inflation swaps, currencies, variable rate mortgages and floating rate notes.

It is also used in most of the Financial Statements world-wide for quoting interest rate being charged on Related Party advances and borrowings.

Measure:
It's quoted in basis points, which, if divided by 100, becomes rate percentage.
e.g. 233 basis points over 1-year LIBOR means if LIBOR on 1-year loans is currently at 4.2% then the quoted loan rate for the customer will be 4.2% plus 2.33% i.e. 6.53%.

Calculation:
It is derived from:
  • a filtered average
  • of the world's most creditworthy banks' interbank deposit rates
  • for larger loans with maturities between overnight and one full year.
It is fixed on a daily basis by the British Bankers' Association every morning at 11:00am London time.

Countries:
Canada, United States, Switzerland and United Kingdom rely on the LIBOR for a reference rate.

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