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 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