The London Interbank Offered Rate (LIBOR) is the average interest rate estimated by leading banks in London that the average leading bank would be charged if borrowing from other banks. LIBOR -It stands for London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world. It is usually abbreviated to Libor or more officially to ICE LIBOR (for Intercontinental Exchange Libor). It was formerly known as BBA Libor (for British Bankers’ Association Libor or the trademark belabor) before the responsibility for the administration was transferred to Intercontinental Exchange. It is the primary benchmark, along with the Euribor, for short-term interest rates around the world. It is an average value of the interest rate which is calculated from estimates submitted by the leading global banks on a daily basis.
Uses: It is used globally in a broad diversity of financial products. They include the following:
- It is used for pricing of interest rate swaps, currency rate swaps as well as mortgages.
- Standard interbank products like forwarding rate agreements, interest rate swaps etc.
- Commercial products like floating rate certificate of deposits and notes.
- Consumer loan-related products like individual mortgages and student loans
LIBOR serves as an internationally accepted means standard interest rate that indicates how much does it costs to the banks to borrow from each other. It is a sign of the strength of the financial system and provides an initiative for the course of future policy rates of central banks.
