The LIBOR or London Interbank Offered Rate is a standard interest rate at which main worldwide banks lend to one another in global interbank market for short terms loans. It serves as internationally accepted key standard interest rate that specify borrowing cost between interbank. The rate is calculated and published each day by the Intercontinental Exchange. The LIBOR is administrated by the Intercontinental Exchange, which ask a question to major global banks that how much they will charge the other bank for short term loan. The interest rate and borrowing cost is calculated by the Waterfall Methodology, a transaction based, standardized data driven layered method.
LIBOR is an average interest rate at which major international banks lend and borrows from one another. It is based on seven different maturities and five major currencies.
Five currencies include:
- United State dollar
- The euro
- The British pound
- The Japanese yen
- The Swiss franc
And seven maturities include:
- Overnight/spot next
- One week
- One month
- Two month
- Three month
- Six month
- Twelve month
The combination of seven maturities and five currencies leads to total of 35 different rates reported and calculated each business day. The most commonly reported and calculated rate is three month United State dollar rate, usually refer as current London Interbank Offered Rate. On daily basis, the Intercontinental Exchange ask major banks that how much they will charge other international banks for short term loan. The lowest and highest values are calculated to take figure of average interest rate. This average interest rate is known as trimmed average. This average rate is posted each day at around 11:55 AM London time by IBA.
LIBOR also serves as basis for consumer loans as well around the world. It has great impact on consumer as much as on the financial institutions. The interest rates on various credit products such as car loans, credit cards, and mortgage rates based on the interbank rate. The change in interest rate govern the ease of lending and borrowing between the banks and consumers.
The LIBOR is used internationally in extensive range of financial products, which include:
- Commercial products like variable rate mortgage, floating rate certificate of notes and deposits and syndicated loans. Syndicated loans are type of loans offered by group of lenders.
- Standard interbank products like interest rate swap, forward rate agreements, options, interest rate futures and swaptions.
- Consumer loans related products like student’s loans and individual mortgages.
- Hybrid products like collateralized mortgage obligations, collateralized debt obligations and wide variety of callable notes, accrual notes and perpetual notes.