Page 33 - Bank Case Studies
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How Libor Works







                                               The London interbank offered rate (LIBOR) is based on
                                               what banks say they pay to borrow from each other.




                                                 British Bankers

                                                    Association


                                                   The highest and lowest
                                                                                The Libor is calculated
                        Banks on panel             quartiles are discarded      for 10 currencies and

                                                   and the remaining rates
              Each day banks around the world          are averaged             15 borrowing periods

              submit a figure to the BBA based on the                           and affects:
              rate at which they think they can

              borrow funds from other banks.



                                                  s                 S                            Libor
                                                                                    S

                                                                  Student
                 Derivatives                    Mortgages         Loans
                                   Loans


              Derivatives      loans            Mortgages        Student loans    Corporate Bonds

              Used to price    Some lenders use   Mortgages that are   About half of   Corporate bonds are
              financial        the Libor as a base   adjustable-rate in   variable-rate private   used by businesses

              instruments such as   and add additional   the U.S. about 45   U.S. student loans   to raise finance and
              swops transactions   interest based on   per cent of prime   are tied to the Libor.   are based usually on
              and futures      the borrower.    mortgages and 80                  a stated rate of

              contracts.                        per cent of                       interest.
                                                subprime have
                                                interest rates based
                                                on the Libor.



               Diagram
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