How is Libor determined?

Libor is the major rate used to price debt stock. Libor is actually a set of several benchmarks that reflect the average interest rate at which large global banks can borrow from each other. There are a total of 150 Libor rates posted each day; interest rates are compiled for loans with 15 different maturities (or due dates) for each of 10 major currencies.

Each morning, just before 11 a.m. Greenwich Mean Time, a group of major banks are asked the rate at which they could borrow funds from other banks. The banks confidentially send their results for each of the 15 loan maturities - ranging from overnight to one year - to the market intelligence firm Thomson Reuters. The organization throws out figures in the highest and lowest quartile and averages the remaining half.

Thomson Reuters publishes the resulting Libor rates, as well as all the contributing rates that the banks provide, by noon each day. According to the British Bankers Association, these numbers appear on over 1 million trading screens around the world and in a wide variety of news sources. Any loans that are tied to one of the Libor indices - for example, a three-month U.S. dollar rate - will change in lockstep with the new figures.


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