-24-
rate of interest at which banks are willing to offer deposits
(i.e., lend Eurodollars) to other prime banks, in marketable
size, in the London Interbank market. In order to determine the
LIBOR rates, the British Bankers’ Association maintains a
reference panel of banks with London offices. Each of these
banks ascertains the rate at which it could borrow funds, were it
to do so by asking for and then accepting interbank offers in
reasonable market size just before 11 a.m. that day. The
deposits have a zero-coupon structure, meaning that no interest
is paid during the life of the deposits but is accrued and paid
at maturity.12 Each LIBOR rate is computed by disregarding the
four highest and the four lowest rates offered by these banks and
then taking the average of the others.
The LIBOR rates, when determined, are instantly communicated
around the world by electronic (on-line) services such as the
Associated Press/Dow Jones Telerate Service, Bloomberg, or
Reuters Monitor Money Rates Service. Separate LIBOR rates are
available and quoted for each standard term (e.g., 1-month, 3-
month, 6-month, 12-month), and the parties to a swap may agree on
any of these LIBOR rates. In most cases, the floating-rate payor
pays no increment or decrement (spread) with respect to the LIBOR
rate, and the rate is said to be quoted flat.
12 A zero rate means that interest, if paid, is paid only at
maturity.
Page: Previous 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 NextLast modified: May 25, 2011