Libor

Good Essays
Gaining a basic understanding of finance can be difficult given the number of complex details and caveats that make up the markets. For this reason, some of the most important concepts often go overlooked or misunderstood, one of those being Libor (London inter-bank offered rate). The rate is widely considered the primary benchmark in finance upon which trillions of dollars of contracts are exchanged.

Libor is a money market interest rate which banks and financial institutions use as a yardstick for borrowing from one another. It is determined each morning from a survey of 11 to 17 leading banks which asks them to estimate a rate they would be willing to pay to borrow money on a short term basis from another institution. Rates are produced
…show more content…
During the recession, rates spiked over concerns that short term lending to distressed financial institutions would backfire. The latest move though has less to do with financial institutions and more to do with new regulatory changes on U.S. money market funds that went into effect in mid-October. The reform requires funds to move from a $1 fixed net asset value (NAV) to a floating NAV along with adopting liquidity fees and redemption gates. These measures have been put in place to safeguard against a repeat of the crisis, which was met with massive outflows and one prominent money market fund “breaking the buck”, dipping below a $1 …show more content…
A move higher makes it increasingly more difficult and expensive for companies to facilitate growth initiatives through borrowing funds, thereby stunting near term earnings potential. Weak fundamentals are just one of many reasons that investors punish stocks and drive prices lower. Some experts recommend hedging against this risk with leverage loan funds or Libor based floating rate funds such as Powershares Senior Portfolio ETF (BLKN). Other options include REITs which have a large percentage of their assets in variable rate loans that benefit with a rise in Libor. Although a higher Libor rate should theoretically drag down the market, many other factors come into play to determine share prices.

An overhaul in the money market industry followed by an increase in Libor rates has evoked shades of the 2008 global financial crisis. But today’s jump is not a signal of credit stress in the financial sector, rather a changing regulatory environment. The new regulations imposed by the SEC have subsequently put pressure on prime money market funds and financial insitutions but also individual borrowers with floating rate debt. That said, the situation brewing in the markets is a sign of greater future investment opportunities as opposed to upcoming

Related Documents

  • Decent Essays

    The government borrows money for various reasons like programs, projects, bailouts of companies, and more. As the government borrows more money, this increases the national debt. Furthermore, a high national debt is bad for the country and citizens. As the debt rises, the interest rate will rise too. Thus, a con of the national debt is the private sector will have no interest in borrowing money with a higher interest rate, and citizens may have to pay higher taxes to compensate for the high national debt.…

    • 728 Words
    • 3 Pages
    Decent Essays
  • Decent Essays

    Euribor Case Study

    • 1659 Words
    • 7 Pages

    Sometimes, it is used to cover the financial troubles of banks. Another reason can be that banks wanted to make more profits using an easier way. Looking from an individual's point of view, the rates also determine the amount of loan that needs to be repaid, where a rigged rate might affect in people unable to pay the loan. Currency traders also watch the Euribor rates constantly and make bets which also contributes to the mass market. With a rigged Euribor, it can lead to a financial crisis and the global market would go into recession.…

    • 1659 Words
    • 7 Pages
    Decent Essays
  • Decent Essays

    Furthermore, if interest rates change after a recession, this could lead to a greater economic downfall that could have been prevented by increasing at a steady rate earlier. My recommendation is that the Fed should increase interest rates steadily in order to protect the economy against a potential recession. If there is an increase in government spending, GDP will increase, but higher interest rates will decrease investment spending and GDP, so an uncertainty will always…

    • 995 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Introduction: What is deficit spending and how does it work To write about deficit spending you must under what is the meaning of deficit spending. A government that spends more over fiscal period, thus creating or enlarging a nation debt balance (Investopedia). Many may say that this is a tool to simulative the economy, however most see it as irresponsible spending by the government. However, many government use deficit spending to pick up the national economy from a recession. To simply put it deficit spending is almost like the government writing a check in account that has no funds to back it.…

    • 748 Words
    • 3 Pages
    Decent Essays
  • Decent Essays

    It will increase the interest rate, which will decrease investment as well as aggregate demand, which will result in lower GDP on contrary as previously said. As this graph shows, the reduction of aggregate demand will lower the price level and lower Real GDP. Contractionary monetary policy restrains inflationary pressures. Business and individuals will spend less and save more which also shift the aggregate demand to the left just like the graph shows. Consumer spending will decline because cost of living is increasing because of the rise of interest…

    • 1325 Words
    • 6 Pages
    Decent Essays
  • Decent Essays

    Then according to Fisher Equations, when the nominal interest rate fixed, the lower inflation will affect to a higher real interest. Therefore, the debtor bears a heavier burden than before, and the real wealth of debtor will fall. Considering of the inflation, deflation is even worse. According to the Keynes conjectured, the debtors have a higher marginal propensity to consume than the creditors. Because the creditor tends to consume less and save more, in order to invest the money in debtors, as a result they have a large proportion of savings.…

    • 1183 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    Money demand and the interest rate are directly correlated so the interest rate goes up also. As previously discussed, the interest rate increases causes business to decrease their investments because it costs more for them to borrow the money to expand their business. This decrease in investment affects output negatively, bringing it back down though not as much because this effect is secondary. The secondary effect for fiscal policy is known as the crowding-out effect, the tendency for increases in government spending to cause reductions in private investment spending. In this case the crowding-out effect was great due to large sensitivity in the interest…

    • 929 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    This type of a crash leads banks to be stingy with their money and only give out loans to individuals with amazing credit scores. This situation leads to the belief that if banks don’t rely on set reserves before giving out loans, another crash such as the one in 2008, could lead many banks to go belly-up. Reserve requirements in a bank function to absorb the shocks that come with loans “going bad” or depositors wanting their money back. Leaving reserve requirements out of the picture and allowing banks to make loans at will would lead to a high-risk situation within the bank and would most likely lead to the bank going bankrupt if the market recedes.…

    • 1550 Words
    • 7 Pages
    Decent Essays
  • Decent Essays

    If there is a floating exchange rate, there can be a lot of money that comes to a country because it pays higher interest rates in the short term. This can make the currency to go up in value against other currencies (Wälti, 2007). On the other hand, if there is a low interest rate, the opposite can happen and money can leave the country and cause the currency to have a lower value. If a currency goes up in value, it becomes more expensive for foreigners to buy goods from the country. This makes it harder to compete when selling goods abroad.…

    • 1997 Words
    • 8 Pages
    Decent Essays
  • Decent Essays

    Uk Economy Case Study

    • 2875 Words
    • 12 Pages

    Rise in interest rate lead to increase in firms cost capital, because companies will have to borrow money at a higher interest rate. This implies that firms need to work harder to generate higher profits; otherwise the high interest rate will eat away its profits. According to (McClure, 2004) ‘‘ if interest rate costs shoot up to such a level that the company has problems paying off its debts, then its survival may be threatened’’. When firms find it had to meet up with their debt obligations, banks will raise the rate they lend to investors since they may default and more risk is involved this will discourage lots of investors from investing in the UK. Also, firms will like to reduce the cost of their business inputs by either reducing its work force or by producing…

    • 2875 Words
    • 12 Pages
    Decent Essays