London Inter Bank Rate (LIBOR)-FAQ's
What Is the LIBOR Interest Rate?
The LIBOR, or London Interbank Offered Rate, is a rate at which banks can borrow money from one another. This rate is updated daily and is offered on unsecured (no-collateral) loans. The LIBOR is often used as an index on adjustable-rate mortgages.
LIBOR is a benchmark rate that is used in international money markets and published daily by the British Bankers Association (BBA), a banking industry trade group. LIBOR approximates the rate at which banks could borrow one another in the marketplace.
LIBOR is determined from responses by BBA members to the following question: "At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am"
LIBOR is determined from responses by BBA members to the following question: "At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am"
The rates are not actual transactions but are indicative of the credit risk and liquidity in the marketplace. LIBOR is quoted at an annualized rate, so a 3 percent LIBOR would be divided by 365 to get the actual cost of borrowing. LIBOR is calculated in 10 different currencies and with 15 maturities ranging from overnight to one year.
History.
The LIBOR first hit the lending market in 1986 in an attempt to bring more uniform lending to the British markets. As banking became more complicated with new and innovative financial products, interest rates had to be managed to control price gouging and unethical lending.
LIBOR as an Index.
Many adjustable-rate mortgages are tied to the LIBOR. An adjustable-rate loan has both a margin (a constant rate) and an index (a fluctuating rate). When calculating interest changes on mortgages, lenders add the margin to the current rate of the index. For example, if a customer has a margin of 3.5 percent and the LIBOR is currently 4.32 percent, the customer's new interest rate will be 7.82 percent.
Other Effects.
The LIBOR controls the ease with which banks can obtain new funds. In times of financial stress or crisis, the LIBOR increases, in turn decreasing lending between banks. Banks tend to hoard capital during down economies to protect their investments and ensure they can meet their own debt payments.
British Bankers Association .
The British Bankers Association sets the LIBOR rate on a daily basis, and it's then disseminated to financial reporting companies and publications. The British Bankers Association was the group responsible for creating the LIBOR rate in the 1980s in response to increasing pressure to standardize high-finance lending.
Where to find LIBOR ?
The LIBOR is published every day in various locations. The Wall Street Journal--both online and in print--publishes the daily LIBOR. Other sources include Bloomberg news services, CNBC and most major newspapers
LIBOR Vs Prime Rate
The London Interbank Offered Rate (LIBOR) and the Prime Rate are both important interest rates used in the lending and investment fields. The rates are used as representative rates in the money markets to price loans and are also used to settle investments and derivative contracts used in the United States and international markets.
Other LIBOR Facts
Thomson Reuters calculates the average of the responses to the LIBOR question. The rates submitted are ranked in numerical order, and then the top and bottom quartile are dropped out to remove the impact of outliers. An average of the remaining rates are calculated and then released to the marketplace.
Billions of dollars of the notional value of swaps and other contracts are tied to the value of various LIBOR rates.
What is the Prime Rate?
The Prime Rate is the interest rate that U.S. banks charge to customers considered to be of the lowest credit risk. The Prime Rate is not adjusted every day, but in response to underlying moves by the Federal Reserve to adjust its rates. The current Prime Rate is 3.25 percent, and has been the same since January 2009.
The Prime Rate is not indicative of the cost of credit like LIBOR, but reflects the borrowing costs of companies. Over the last 10 years, the Prime Rate has ranged from 9.5 percent to as low as 3.25 percent.
Other Prime Rate facts
Banks typically price the cost of credit to other borrowers by adding margin to the prime rate. Loans that are priced at "100 basis points over prime" would currently be at 4.25 percent. The Prime Rate has no application outside the United States, and is used almost exclusively in domestic money and loan markets.
How to find Rates?
Investors can find the current LIBOR through information vendors that obtain a license to distribute the results. Bloomberg publishes the current and historical LIBOR and Prime Rates on its website. Another vendor that provides current and historical LIBOR and Prime Rates is Bank rate.
Comments