Chapter 8, Problem 5DQ

Summary Introduction

To explain: LIBOR and whether it is usually higher or lower than U.S. prime interest rate.

Introduction:

Prime interest rate:

The companies or corporations that have the utmost credit ratings with respect to commercial banks have an advantage over other corporations who have an average or low credit rating. The advantage is that they get loans on a lower interest rate and this interest rate is popularly known as prime interest rate. This rate is determined by the rate of federal funds.

LIBOR:

LIBOR stands for London interbank offered rate and is a parameter which is accepted globally by banks as a standard measure for interest rate when large financial institutions tend to lend money to each other for loans of short duration in the international interbank market.