LIBOR stands for the London InterBank Offered Rate. It is also termed as ICE LIBOR these days because the Inter Continental Exchange or ICE governs this rate. It describes the average rate of interest, estimated by banks in London for borrowing from other banks on fixed terms. LIBOR was first controlled by the British Bankers Association or BBA but it then passed on the responsibility to ICE after some legal issues.
LIBOR rates are calculated in five currencies. They are also given for seven different borrowing periods. This means that a total of 35 rates have to be published by ICE. Different financial institutions around the world use these rates in order to calculate their own interest rates and conditions. It is in fact the most important benchmark for calculating the value of short term loans and securities.
The Details of LIBOR
The LIBOR rates are issued in the US Dollar, British Pound, Euro, Swiss Franc and the Japanese Yen. There are seven different loan periods as well, which include one day, one week, one month, two months, three months, six months and 12 months.
Method of Calculation
ICE calculates LIBOR rates in a rigorous manner. These rates are published through Thomson Reuters. It acts as an important index used by most financial institutions around the world. A global panel of banks is surveyed each day to find out about the rates at which they could borrow funds. The organization then eliminates the extreme ends of the survey entries by taking out the four maximum and four minimum value interest rates. There are a total of 18 banks and the average response of the mean population of ten banks is published by the ICE organization.
It is important to understand that LIBOR serves as an index. The most commonly used LIBOR is the three months US Dollar LIBOR, which is used around the world for important financial calculations. The rates are usually dependent on the time of maturity which means there is a higher interest for longer termed loans.
Who Uses LIBOR?
LIBOR rates are used by many lending facilities around the world, as well as by organizations responsible for generating securities. LIBOR values are used as a reference in calculating the interest on private and public bonds as well as employed to describe mortgage rates and student loans. The rates of credit card loans also follow these values and they can even be used to find out if it is better to perform certain business transactions in Euros or in US Dollars.
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