What Is LIBOR (London Interbank Offered Rate)?

 

What Is LIBOR?

LIBOR stands for London Interbank Offered Rate. It’s the interest rate at which major banks lend to one another for the short-term in the international market.

Why is LIBOR important?

LIBOR serves as a well-accepted benchmark interest rate, based on which the interest rates for many other loans are decided. This not only impacts loans between banks and prices of many derivative products, but also impacts the interest rates on consumer loans like credit cards, car loans, student loans and adjustable or floating rate mortgages.

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Is LIBOR a fixed rate?

No, it is calculated and published daily by the Intercontinental Exchange or ICE, based on loans of different maturities in 5 currencies. There are a total of 35 different LIBOR rates, but the most common is the three-month U.S. dollar rate. This rate is commonly called the LIBOR rate.

Why is London Inter-Bank Offered Rate used in the US? Doesn’t the US have something of its own?

Ha ha… Good question! LIBOR is planned to be phased out world-wide by 2021. So although it is used in the US right now, it would be replaced by the Secured Overnight Financing Rate or SOFR. But that’s a topic for another time…

LIBOR - London Interbank Offered Rate
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