How is Libor determined?

By Daniel Kurt AAA
A:

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.

RELATED FAQS

  1. How does a bond's coupon interest rate affect its price?

    Find out why the difference between the coupon interest rate on a bond and prevailing market interest rates has a large impact ...
  2. What are the differences between APR in Europe and the U.S.?

    Learn how the regulatory authorities in the U.S., the European Union and the U.K. treat the calculation and disclosure of ...
  3. Why is APR used to compare long-term loans?

    See what benefits an annual percentage rate, or APR, offers to consumers that other interest rate calculations might not, ...
  4. How is interest charged on most lines of credit?

    Learn how most financial institutions calculate interest on lines of credit by using the average daily balance method and ...
RELATED TERMS
  1. Welfare Capitalism

    Definition of welfare capitalism.
  2. ICE LIBOR

    See LIBOR
  3. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  4. Interest Rate Index

    An index that is based on the interest rate of a financial instrument ...
  5. LIBOR Scandal

    A scandal in which financial institutions were accused of fixing ...
  6. Global Recession

    An extended period of economic decline around the world. The ...
Related Articles
  1. Eyeing China? Consider These Economic ...
    Economics

    Eyeing China? Consider These Economic ...

  2. How A Limited Government Affects A Country's ...
    Economics

    How A Limited Government Affects A Country's ...

  3. The Best 4 Places To Invest In Latin ...
    Economics

    The Best 4 Places To Invest In Latin ...

  4. Where NOT To Invest in Latin America
    Economics

    Where NOT To Invest in Latin America

  5. Understanding The Treasury Yield Curve ...
    Economics

    Understanding The Treasury Yield Curve ...

Trading Center