Q:

What does a one-year LIBOR rate and index mean?

A:

Quick Answer

The London Interbank Offered Rate is the rate of interest that one bank in the United Kingdom offers to another bank in the wholesale markets in London. The index shows the rate of interest this week, last month and the same time in the previous year, according to Bankrate.

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Full Answer

The U.S. capital markets use this standard financial index, and The Wall Street Journal shows the one-year LIBOR rate and index, explains Bankrate. Typically this rate and index display smaller changes than the prime rate.

The one-year LIBOR helps determine the costs of various variable-rate loans. When economic conditions change or fluctuate, lenders use an index such as LIBOR to adjust the interest rates on loans, says Bankrate. When determining the final interest available to a borrower, the banks add a couple of percentages points to the interest. This percentage is the margin and does not vary. When the LIBOR interest rate increases, any loans connected to the index find increased interest rates.

In the past, the LIBOR's influence affected mostly corporate financial transactions and loans, according to Bankrate. Corporations used it as a reference figure. As of 2015, consumer loans and financial transactions find fluctuation and basis influenced by the one-year LIBOR rate and index.

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