What is the primary function of LIBOR?

The primary function of LIBOR, which stands for the London Interbank Offered Rate, is to serve as a benchmark for determining interest rates on various loans and financial products. Banks use LIBOR as a reference point for setting the rate on adjustable-rate mortgages, corporate loans, and other debt instruments. By providing a transparent and standardized interest rate that reflects the rates at which major global banks are willing to lend to one another, LIBOR plays a crucial role in the global financial system.

Any variations in LIBOR can directly affect the cost of borrowing for businesses and consumers alike. Financial institutions rely on this rate to price loans and assess risk accurately. Therefore, understanding LIBOR is essential for evaluating borrowing costs and the pricing of numerous financial contracts in the debt and money markets.