LIBOR

AAA

DEFINITION of 'LIBOR'

LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. It stands for IntercontinentalExchange London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world. LIBOR is administered by the ICE Benchmark Administration (IBA), and is based on five currencies: U.S. dollar (USD), Euro (EUR), pound sterling (GBP), Japanese yen (JPY) and Swiss franc (CHF), and serves seven different maturities: overnight, one week, and 1, 2, 3, 6 and 12 months. There are a total of 35 different LIBOR rates each business day. The most commonly quoted rate is the three-month U.S. dollar rate. 

INVESTOPEDIA EXPLAINS 'LIBOR'

LIBOR (or ICE LIBOR) is the world’s most widely-used benchmark for short-term interest rates. It serves as the primary indicator for the average rate at which banks that contribute to the determination of LIBOR may obtain short-term loans in the London interbank market. Currently there are 11 to 18 contributor banks for five major currencies (US$, EUR, GBP, JPY, CHF), giving rates for seven different maturities. A total of 35 rates are posted every business day (number of currencies x number of different maturities) with the 3-month U.S. dollar rate being the most common one (usually referred to as the “current LIBOR rate”).

LIBOR or ICE LIBOR's primary function is to serve as the benchmark reference rate for debt instruments, including government and corporate bonds, mortgages, student loans, credit cards; as well as derivatives such as currency and interest swaps, among many other financial products.

For example, take a Swiss franc-denominated Floating-Rate Note (or floater) that pays coupons based on LIBOR plus a margin of 35 basis points (0.35%) annually. In this case, the LIBOR rate used is the one-year LIBOR plus a 35 basis point spread. Every year, the coupon rate is reset in order to match the current Swiss franc one-year LIBOR, plus the predetermined spread.

If, for instance, the one-year LIBOR is 4% at the beginning of the year, the bond will pay 4.35% of its par value at the end of the year. The spread usually increases or decreases depending on the credit worthiness of the institution issuing debt.  

Another prominent trait of LIBOR or ICE LIBOR is that it helps to evaluate the current state of the world’s banking system as well as to set expectations for future central bank interest rates.  

ICE LIBOR was previously known as BBA LIBOR until February 1, 2014, the date on which the ICE Benchmark Administration (IBA) took over the Administration of LIBOR.

To learn more about the basics of constructing LIBOR rates, go to the official ICE site.

VIDEO

Loading the player...
RELATED TERMS
  1. LIBOR Flat

    An interest rate benchmark used to establish the floating interest ...
  2. LIBOR Curve

    A graphical representation of various maturities of the London ...
  3. Euro Interbank Offer Rate - EURIBOR

    The rates offered to prime banks on euro interbank term deposits. ...
  4. London Interbank Bid Rate - LIBID

    The average interest rate which major London banks borrow Eurocurrency ...
  5. Euro LIBOR

    London Interbank Offer Rate denominated in euros. This is the ...
  6. Euro Overnight Index Average - ...

    The weighted average of overnight Euro Interbank Offer Rates ...
RELATED FAQS
  1. What does the notional principal of a derivative contract refer to?

    The notional principal amount of a derivative refers to the nominal, or predetermined, value used to calculate payments made ... Read Full Answer >>
  2. How high has the prime rate ever gotten?

    The highest prime rate recorded in the United States was 21.50% in December 1980 — a record that still stands as a landmark ... Read Full Answer >>
  3. What are the risks involved with swaps?

    The main risks associated with interest rate swaps, which are the most common type of swap, are interest rate risk and counterparty ... Read Full Answer >>
  4. What are interest rate swaps on the OTC market?

    Interest rate swaps are agreements where counter parties agree to exchange interest rate cash flows based upon the difference ... Read Full Answer >>
  5. How does LIBOR compare to the Federal Reserve rate as an accurate indicator?

    The question sometimes arises between analysts as to which rate is more accurately predictive of future interest rates and ... Read Full Answer >>
  6. How did LIBOR come into use?

    LIBOR, or the London Interbank Offered Rate, originated in 1986 after major banks began doing significant daily trading in ... Read Full Answer >>
  7. How can LIBOR be used as an economic indicator?

    LIBOR, or ICE LIBOR, is a benchmark rate calculated by the Intercontinental Exchange. Contributor banks may borrow unsecured ... Read Full Answer >>
  8. Why is LIBOR sometimes referred to as LIBOR ICE?

    The ICE LIBOR (previously known as BBA LIBOR) is a standard rate using an average of the rate at which a contributing panel ... Read Full Answer >>
  9. Who determines the LIBOR rate?

    The LIBOR rate, or London Interbank Offered Rate, is a benchmark rate at which individual contributor panel banks can borrow ... Read Full Answer >>
  10. Where on the internet can I find LIBOR rate information?

    The London Interbank Offered Rate, or LIBOR, is charged by individual contributor banks for loans; it is calculated using ... Read Full Answer >>
  11. What is the difference between LIBID and LIBOR?

    Both LIBID and LIBOR are rates primarily used by banks in the London interbank market. The London interbank market is a ... Read Full Answer >>
Related Articles
  1. Economics

    London Interbank Offered Rate (LIBOR)

    Learn more about this rate which banks use to determine the amount of interest to charge other banks.
  2. Investing News

    The LIBOR Scandal

    Barclays and other banks are alleged to have submitted artificially low LIBOR rates between 2007 and 2009.
  3. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  4. Options & Futures

    An Introduction To LIBOR

    This influential rate is published daily in Britain, and felt all around the world.
  5. Stock Analysis

    Playing Rising Rates with Ultra-Short Term Bonds

    With rising rates likely, investors may want to consider adding a dose of ultra-short bonds to their portfolios. Here are some ETFs to consider.
  6. Economics

    Is Texas The Future Of America?

    The top three fastest-growing cities are located in Texas and 20% of jobs created between 2009 and 2014 were in the Lone Star State.
  7. Markets

    Rising Interest Rates: Who it Helps, Who it Hurts

    When interest rates rise, the impact hits some of us differently. Here's why.
  8. Stock Analysis

    3 Stocks To Buy and Hold For the Rest of 2015

    One of the dominant themes to consider for 2015 is the normalization of monetary policy as the Fed raises interest rates.
  9. Entrepreneurship

    Fed Raising Rates Affects Startup Funding

    With interest rates having nowhere else to go but up, the Fed’s impending interest rate raise will likely begin to reverse the flow of startup funding.
  10. Economics

    Explaining Demographics

    Demographics is the study and categorization of people based on factors such as income level, education, gender, race, age, and employment.

You May Also Like

Hot Definitions
  1. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  2. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  3. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  4. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  5. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  6. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!