What is the LIBOR Index?
Some would say LIBOR is an acronym for the “Long Island Board of Realtors” but although the LIBOR index is closely related to New York and the real estate industry it’s certainly not the meaning of LIBOR as used on Wall Street and around the world. LIBOR is an acronym for the “London Interbank Offered Rate”
This rate is comparable to the US Federal Funds rate but is used mainly to determine the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (also known as the interbank market)
Most US consumers only started hearing about the term LIBOR over the past 5-6 years as many of the now famous “adjustable rate” and “option arm” mortgages were tied to movements in the LIBOR - although in commercial markets the LIBOR has been widely used since its introduction to guide interest rates on commercial paper.
The LIBOR rate is an extremely interesting index as its value can determine how risk adverse banks are to lend funds to each other. Over the past few months as the financial markets have been introduced to the global economic crisis in effect we have seen LIBOR value increase significantly therefore showing a visible gauge of bank’s adversity to lending to each other in current markets.
Many LIBOR rates exist such as the 1-Month, 6- Month and 1-Year LIBOR. To the right you will see an automatic feed for the current LIBOR rate which is updated daily.
Even though the LIBOR Index is one of the most important interest rates in the financial markets the Prime Rate has probably the most profound affect on loan payments for such things as home equity loans, auto loans, credit cards and other common consumer financial products.
- The Prime Rate is more popular among consumer loans »
- the LIBOR rate is used more when banks loan to each other »
- What does CPI, PPI stand for? »
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