Financial Dictionary -> Investing -> LIBOR

LIBOR is the London Interbank Offered Rate, meaning all banks that are members of the London interbank market can borrow money from banks in the network at this offered rate and is comparable to the United States' Federal Funds rate. The United States, Canada, Switzerland and obviously the UK all have connections to the LIBOR.

The rate fluctuates, although it is fixed at the beginning of every day by the British Bankers' Association (usually between 11am and 12pm). They get the figure by averaging the interbank deposit rates of substantial loans that mature everywhere between 24 hours and one year from several of the world's largest and successful banks.

This London Interbank Offered Rate is one of the most popular figures used for determining short term interest rates in the world and its rate is what borrowers with top credit are able to obtain loans at. The LIBOR is also used to determine the rate that borrowers with less than perfect credit get. A very reliable borrower, such as a international conglomerate with an impeccable credit rating and financial history might be able to obtain a loan with 1 year term at the LIBOR with an added few points, whereas a much less preferred borrower will have their rates based on the LIBOR but they will be less favorable.

The LIBOR came in to being in 1984 as banks began actively trading in various new financial instruments, such as foreign currency options, interest rate swaps and things like forward rate agreements. Although this brought more business and greater diversity to the prospering London Interbank markets, it was determined that problems would arise if rates weren't combined between all the participating banks and institutions; thus the LIBOR began to filter in to the system.

All businesses should strive for the LIBOR rate, although only the elite truly get it.