Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

London Interbank Offered Rate (LIBOR)

What it is:

The London Interbank Offered Rate (LIBOR) is the base lending rate banks charge each other in the London wholesale money market.The definition of LIBOR on InvestingAnswers

How it works (Example):

LIBOR is an average of inter-bank deposit rates offered by members of the British Bankers Association (BBA). Because of its basis on supply and demand, LIBOR is used as the rate of reference for many securities around the globe. There are 15 different LIBOR rates, each corresponding to varying maturity dates and currencies.

Why it Matters:

LIBOR is one of the most widely used benchmarks for short-term interest rates and is unlike the prime rate in the United States, which is somewhat arbitrarily based on certain banks' lending costs plus a profit margin.

Borrowers generally support the use of LIBOR in interest-rate calculations because it represents a true market rate and is generally lower than the U.S. prime rate.