AboutLIBORLondon interbank offered rate (LIBOR) is thereference rate in London for Eurocurrency depositsEurocurrency is a time deposit of money in aninternational bank located in a country differentfrom the country that issued the currency. The Eurocurrency market operates at interbank orwholesale level. The rate charged by banks withexcess funds is referred to as the interbank offered rateThere is a LIBOR for Eurodallors, Euro-Canadiandollars, Euroyen and euros
About LIBOR ❖London interbank offered rate (LIBOR) is the reference rate in London for Eurocurrency deposits. ❖Eurocurrency is a time deposit of money in an international bank located in a country different from the country that issued the currency. ❖The Eurocurrency market operates at interbank or wholesale level. The rate charged by banks with excess funds is referred to as the interbank offered rate ❖There is a LIBOR for Eurodallors, Euro-Canadian dollars, Euroyen and euros
An Example of an Interest RateSwapFirm B is a BBB-rated U.S. company. Itneeds $10,000,000 to finance an investmentwith a five-year economic life.Firm B is considering issuing 5-year fixed-rateEurodollar bonds at 11.75 percent. Alternatively, firm B can raise the money byissuing 5-year FRNs at LIBOR + 1/2 percent. Firm B would prefer to borrow at a fixed rate
An Example of an Interest Rate Swap ❖Firm B is a BBB-rated U.S. company. It needs $10,000,000 to finance an investment with a five-year economic life. ▪ Firm B is considering issuing 5-year fixed-rate Eurodollar bonds at 11.75 percent. ▪ Alternatively, firm B can raise the money by issuing 5-year FRNs at LIBOR + ½ percent. ▪ Firm B would prefer to borrow at a fixed rate
FRNsFloating-rate notes are typically medium-term bonds with coupon paymentsindexed to some reference rate.Common reference rates are either threemonth or six-month US dollar LIBOR*Coupon payments on FRN are usuallyquarterly or semiannual and in accordWwith the reference rate
FRNs ❖Floating-rate notes are typically mediumterm bonds with coupon payments indexed to some reference rate. ❖Common reference rates are either threemonth or six-month US dollar LIBOR ❖Coupon payments on FRN are usually quarterly or semiannual and in accord with the reference rate