What is LIBOR? - Definition and Current Statistics


LIBOR is currently between .28 and 1.09% for all maturities. (as of December 16, 2011)

LIBOR is also known as the London Interbank Offered Rate and is the most active interest rate market in the world. LIBOR is similar to our Fed Funds rate and is an average of the rates that banks participating in the London money market offer each other for short term deposits. LIBOR is also used in setting the price of interest rate futures, swaps, Eurodollars and other financial derivatives. Due to London's position as a global financial center, LIBOR applies not only to the Pound Sterling, but also to major currencies such as the Canadian Dollar,the US Dollar and the Japanese Yen.

LIBOR is a compilation of rates prepared by the British Bankers Association (BBA), and is published 11 am each day in conjunction with Reuters. The BBA is comprised of a panel of banks representing countries in each currency. LIBOR is calculated for periods as short as overnight and as long as a year. While the interest rates that banks offer each other vary throughout the day, LIBOR is fixed for the 24 hour period. Generally, the spread between the instantaneous rate and LIBOR is very small.

Eurodollar futures are derived from LIBOR. Eurodollars (not to be mistaken for the Euro) are US dollars deposited in banks outside of the US, primarily Europe. Deposits held outside the US are not subject to Federal Reserve margin requirement thus allowing leveraging of those deposits. The interest rate paid on Eurodollars is largely determined by LIBOR. Thus, eurodollar futures provide a way of hedging against future interest rate changes.

Why would you care about LIBOR? The main reason is that it is used to set other rates. Just like the Fed Funds rate is used. If you have an adjustable-rate loan that is due to renew, the rate you will get is usually based on the LIBOR rate. Even if you have a fixed-rate loan and carry no credit card debt, an increasing LIBOR will affect you by making consumer and business loans more expensive thus reducing liquidity. All of this in turn will slow economic growth. In a period of already slow growth or recession, this would be very undesirable.

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What is LIBOR? - Definition of LIBOR



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