What Is LIBOR And Why It Matters To You

By Xavier Brenner

A relatively obscure interest rate called the London Interbank Offered Rate, or LIBOR, has been in the news in recent months. You’ve probably read stories about how a handful of global banks manipulated the rate for quick profits at the expense of consumers. News broke just last week that NYSE Euronext (NYX) won a contract to administer LIBOR, replacing the British Bankers’ Association.

LIBOR is the rough equivalent of the U.S . federal funds rate— the basis for the interest rate that banks charge each other for loans. In theory, any given LIBOR rate is the average bank borrowing cost for unsecured funds, based on data supplied by participating lenders and representing market conditions.

Think of it as a daily temperature reading of the money markets. LIBOR affects the price of $300 trillion worth of securities and loans around the world, including a variety of U.S. mortgage products.

Marketplace’s Paddy Hirsch recently posted an excellent Whiteboard discussion on how the LIBOR rate is set:

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

null

More from Stocks

Has Wall Street Completely Lost Its Mind on General Electric?

Has Wall Street Completely Lost Its Mind on General Electric?

Stocks Search for Direction as Trump Comments Lead to Worries Over China Talks

Stocks Search for Direction as Trump Comments Lead to Worries Over China Talks

Did Trump Just Torpedo the Stock Market Again?

Did Trump Just Torpedo the Stock Market Again?

10 Questions for PayPal Ahead of Its Big Investor Day

10 Questions for PayPal Ahead of Its Big Investor Day

Lowe's Taps Home Depot Veteran As New CEO

Lowe's Taps Home Depot Veteran As New CEO