The LIBOR rate (London Interbank Offered Rate) is a benchmark interest rate that represent the average interest rate at which major global banks are willing to lend to-ne another in the London interbank market for short-term loans.
The
rate is calculated and published daily by Intercontinental Exchange (ICE),
based on submissions from a panel of banks that reflect their borrowing costs.
LIBOR is used as a reference rate for a wide range of financial products,
including variable rate mortgages, loans and derivatives. It is considered a
key benchmark for the global financial system and is closely monitored by
financial institutions, investors and regulators.
However,
as of December 2021, LIBOR is being phased out and will no longer be available
after December 31, 2021, due to concerns over its reliability and susceptibility
to manipulation.
The
LIBOR rate is determined by a daily survey of major banks,
which report the interest rates they would charge to lend funds to other banks
for various terms and currencies in the London Interbank market. The intercontinental
Exchange (ICE), which is the administrator of LIBOR
calculates the rate as the average of reported rate after
excluding the highest and lowest 25% of submissions.
The
survey is conducted for five currencies (USD, EUR, GBP, CHF and JPY) and seven
tenors (overnight, one week, one month, two months, three months, six months
and twelve months). For example, the USD LIBOR rate for the months is the
average interest rate at which a panel of banks would lend US dollars to each
other for a period of there months in the London interbank market.
The
LIBOR rate is widely used as a benchmark for a variety of financial products,
such as mortgages, loans and derivatives. Financial institutions use it t
determine interest rates on loans and to price derivatives, such as interest
rate swaps. Investors also use LIBOR as a benchmark to evaluate the performance
of fixed income investments.