LIBOR – The World Interest Rate
LIBOR or ICE LIBOR (formerly BBA LIBOR) is the benchmark interest rate, in which some of the world’s leading banks collect each other for short-term loans. It stands for InterContinental Exchange London Interbank Offered Rate and serves as a first step to calculate the interest rates of various loans worldwide. LIBOR is managed by ICE Benchmark Administration (IBA), and is based on five currencies: US Dollar (USD), Euro (EUR), pound sterling (GBP), Japanese yen (JPY), and Swiss franc (CHF).
LIBOR serves seven different time periods: overnight, one week, and 1, 2, 3, 6 and 12 months. There are a total of 35 different LIBOR levels every business day. The most commonly quoted rate is the three-month US dollar rate (commonly referred to as the “current LIBOR rate”).
LIBOR (or ICE LIBOR) becomes the most widely used benchmark of short-term interest rates in the world. Serves as a leading indicator for the average level, in which the contributing bank can obtain short-term loans on the London interbank market. There are currently 11 to 18 bank contributors for five major currencies (US $, EUR, GBP, JPY, CHF). LIBOR sets the tariff for seven different maturity periods. A total of 35 tariffs are posted every working day (number of times currency different amount due).
The main function of LIBOR or ICE LIBOR is to serve as a reference 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 Floating Rate (or floater) Nominal Floating Rate coupled with a LIBOR coupon plus a margin of 35 basis points (0.35%) per year. In this case, the LIBOR rate used is a one-year LIBOR plus spread of 35 basis points. Each year, the coupon rate is reset to match current Swiss Swiss franc LIBOR, plus pre-determined spreads.
If, for example, a one-year LIBOR is 4% at the beginning of the year, the bond will pay 4.35% of its face value at the end of the year. This spread usually increases or decreases depending on the creditworthiness of the institution issuing the debt.
Another outstanding feature of LIBOR or ICE LIBOR is to help evaluate the current state of the banking system, as well as 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) takes over the LIBOR Administration.