LIBOR Curve

What is LIBOR Curve?

LIBOR curve represents graphically, the values of the LIBOR rate at various maturity intervals such as one-month rate, two-month rate, etc and it is used by various banks and other financial institutions for determining the interest rate for debt-based products and other financial products.

Example of LIBOR Curve

Let us have a look at an example of a one-year LIBOR Curve of the year 2019.

Example of LIBOR Curve 2

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For eg:
Source: LIBOR Curve (wallstreetmojo.com)

The curve is based on the following data.

Month Rate
Dec1.96%
Nov1.93%
Oct 2.04%
Sep1.95%
Aug2.24%
Jul2.20%
Jun2.41%
May2.71%
Apr2.73%
Mar2.88%
Feb2.96%
Jan3.00%

The curve here represents the movement in the LIBOR interest rateLIBOR Interest RateLIBOR Rate (London Interbank Offer) is an estimated rate calculated by averaging out the current interest rate charged by prominent central banks in London as a benchmark rate for financial markets domestically and internationally, where it varies on a day-to-day basis inclined to specific market conditions.read more on a monthly basis. The rates for a period of twelve months is depicted in the graph. By having a look at the graph, the LIBOR rate for all twelve months can be determined.

Uses of LIBOR Curve

Importance of LIBOR Curve

LIBOR curve is an important tool for banks and financial institutions and is based on the globally determined benchmark rate. The same is useful for determining the interest rates for lending and other financial products such as interest rate swapsInterest Rate SwapsAn interest rate swap is a deal between two parties on interest payments. The most common interest rate swap arrangement is when Party A agrees to make payments to Party B on a fixed interest rate, and Party B pays Party A on a floating interest rate.read more and LIBOR futures. A majority of global financial products are based on LIBOR. The rate is also used by the regulatory authorities to suggest the maximum spread at which loans can be given to the borrowers abroad.

LIBOR Curve vs. Swap Curve

Conclusion

LIBOR curve graphically represents the LIBOR rate for various maturities. The rate is being used globally by the leading banks and other financial products and continues to be used to date.

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