There are no prime rates on the London Interbank Offered Rate, as the prime rate is the interest that a bank charges its least risky customers while LIBOR is a benchmark rate on short-term loans between certain global banks, explains Investopedia. Typically, the LIBOR three-month USD rate is used.Continue Reading
A high prime rate leads to high interest rates on consumer loans and mortgages, and vice versa, states Investopedia. Since loans made at the prime rate contain the least likelihood of default, riskier loans must carry higher interest to be an attractive option for the bank. The prime rate chiefly depends on the federal funds rate, the rate on overnight loans between banks.
LIBOR is designed to serve as a benchmark for interest rates on financial instruments worldwide including bonds, mortgages and derivatives, notes Investopedia. It is considered the most-reliable indicator for the interest rate at which participating banks lend to each other on the London interbank market. LIBOR is also used an indicator of the health of the global financial system and as a bellwether for interest rate changes initiated by central banks. The interest rate on financial instruments using LIBOR as a benchmark may be quoted in the form of LIBOR plus a percentage-point spread whose size depends on the risk of the instrument. LIBOR rates for seven maturities in five currencies are calculated every working day.Learn more about Credit & Lending