The daily floating London Interbank Offer Rate, or LIBOR, is based on five lead currencies: the USD, CHF, EUR, GBP and JPY, explains Investopedia. It is the benchmark used by major banks to calculate interest rates on short-term loans exchanged with other banks around the world.
LIBOR is administered by the ICE Benchmark Administration, or IBA, according to Investopedia. As the benchmark reference rate for debt instruments, the LIBOR is applied to the calibration of exchange for secondary market derivatives, government and corporate bonds, and mortgage securities, as well as student loans and credit card interest. The LIBOR is also used to assess the world banking system and to set interest rate guidelines for future central bank policy.
LIBOR is applied to seven maturities, which include overnight, one week, and one, two, three, six and 12 months, says Investopedia. There are 35 LIBOR rates reported each business day. The ICE LIBOR is the most commonly quoted rate, which is the three-month USD rate.
The Floating-Rate Note, or floater, pays coupon rates based on the LIBOR plus margin basis points computed annually, explains Investopedia. The coupon rate is reset to match a lead-currency estimated one-year LIBOR and a predetermined spread. Credit worthiness affects the fluctuation of a spread, depending on the institution issuing the debt.