The London Interbank Offered Rate (LIBOR)

The London Interbank Offered Rate (LIBOR) is the reference rate at which large banks indicate that they can borrow short-term wholesale funds from one another on an unsecured basis in the interbank market.
libor

Purpose

LIBOR serves two primary purposes in modern markets as:

  • Reference rate: A reference rate is a rate that financial instruments can contract upon to establish the terms of agreement.
  • Benchmark rate: A benchmark rate reflects a relative performance measure, oftentimes for investment returns or funding costs.

LIBOR serves as the primary reference rate for short-term floating rate financial contracts like swaps and futures

Who calculates LIBOR?

The British Bankers’ Association (BBA), a private trade association, constructs LIBOR, and Thomson Reuters publishes it worldwide.

Important factors related to LIBOR

  • LIBOR is actually a set of indexes. There are separate LIBOR rates reported for 15 different maturities (length of time to repay a debt) for each of 10 currencies.
  • The shortest maturity is overnight, the longest is one year.
  • The panel surveyed to construct the dollar LIBOR is made up of the 18 banks

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