Libor Interest Rates

London Inter Bank Offered Rate (LIBOR) interest rate is defined as the interest rate that banks charge each other for one-month, three-month, six-month and one-year loans. The rate is used by all banks in London. It is a benchmark for bank rates, worldwide.[br] It is the rate at which the world’s most preferred borrowers are able to borrow money. Also, this is the rate on which the rates for less preferred borrowers are based.

 

The LIBOR interest rates are commonly used as a reference rates for a wide range of financial instruments such as:

·      Forward rate agreements

·      Short-term interest rate futures contracts

·      Interest rate swaps

·      Inflation swaps

·      Floating rate notes

·      Syndicated loans

·      Variable rate mortgages

·      Currencies like the US dollar and Eurodollar

 

Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and the UK. The British Bankers Association (BBA) decides the LBOR rate. The BBA does that in conjunction with a number of banks that represent a particular currency and country. The LIBOR report is published on Reuters.

Libor Interest Rates: Loans

The advantages of getting a loan based on LIBOR are:

·      Easy and wide availability

·      They provide more options than on loans based on other indexes.

·      When the Mortgage Loan Rates go down, the LIBOR index goes down and enables borrowers to save more money.

 

The disadvantages are:

·      MLR on a LIBOR can rise quickly when the index goes up.

·      Interest rates are likely to fluctuate. This means that borrowers are going to have to pay for the interest changes after they choose to refinance with a LIBOR loan.

·      Estimation becomes difficult for a long term payment plan.

Libor Interest Rates: Calculations

Libor rates are updated every day. The information of borrowing over several time periods are taken into account and the rate is calculated. Before noon, the daily rate is posted regularly.[br]

 

The rate is set based on an equation calculated based on the following data:

·      Interest rates from 16 banks are collected daily at 11 a.m.

·      The middle half of the data is averaged together.

·      This number is the Libor rate for that business day.

 

This calculation is repeated to calculate the rates for each loan period from one day to a period of 12 months. Also, the rate is quoted in several currencies.