Legal Definitions - LIBOR

Definition: LIBOR stands for London Interbank Offered Rate. It is a daily compilation of the interest rates that major international banks charge each other for large-volume, short-term loans of Eurodollars. These rates are calculated out to one year and are used as the underlying interest rates for derivative contracts in currencies other than the euro.

Example: Let's say Bank A needs to borrow a large amount of money for a short period of time. They approach Bank B and ask for a loan. Bank B agrees to lend the money but wants to charge interest on the loan. The interest rate that Bank B charges Bank A is recorded as part of the LIBOR rate. This rate is then used as a benchmark for other loans and financial contracts.

Explanation: LIBOR is an important benchmark for the financial industry. It helps to determine the interest rates for a wide range of financial products, including mortgages, credit cards, and student loans. The rate is calculated based on the interest rates that major banks charge each other, so it reflects the current state of the financial market. This makes it a useful tool for investors and borrowers alike.