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What Is the 1-Yr LIBOR Index?

What Is the 1-Yr LIBOR Index? thumbnail
The 1-year LIBOR Index has a major effect on adjustable rate mortgages worldwide.

The 1-Year LIBOR Index refers to the London Interbank Offered Rate.

  1. Definition

    • The LIBOR Index is the interest rate at which banks lend to other banks in the London wholesale market. The LIBOR rate is actually four different rates: one year, six months, three months and one month.

    History

    • The LIBOR Index was initially born in 1986 out of a collection of British Bankers Association Interest Settlement rates. Today, LIBOR is based off a number of participating banks around the world.

    Significance

    • Because it determines the amount of interest that banks worldwide must pay, the LIBOR Index has an important effect on the global economy. Specifically, it affects rates on loans and other credit instruments issued by financial institutions almost everywhere.

    LIBOR mortgages

    • After economic troubles began, the general public became more aware of the LIBOR Index due to its connection with some of the adjustable rate mortgages that helped bring on the global recession in 2008.

    Size

    • Donald MacKenzie, a University of Edinburgh professor, estimates that about $10 trillion in loans worldwide are connected to LIBOR, including about half of adjustable rate mortgages in the United States.

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References

  • Photo Credit chart background image by Stasys Eidiejus from Fotolia.com

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