Libor and the OIS
These are two of the most important interest rates in the world. Libor is the London Interbank offered rate. The overnight index swap (OIS) is a broadly comparable rate in the US.
These are two of the most important interest rates in the world. Libor is the London Interbank offered rate. This is published by the British Banking Association based on averaging the rates at which major British banks are prepared to lend to each other.
The higher Libor is in relation to the Bank of England rate, the more nervous these banks are of each other. It is also used as the basis for pricing variable-rate mortgage products and commercial loans (for example, a company might be asked to pay a rate of, say, Libor+1%, depending on its credit rating).
In the US, the overnight index swap (OIS) is a broadly comparable rate, although it is calculated differently. It represents the average fixed rate US banks are prepared to offer in exchange for a short-term floating (ie, variable) rate of interest (called a swap). These swaps allow borrowers to hedge their exposure to rising rates.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The gap between Libor and the OIS is called the Libor/OIS spread and is another useful fear guage.
See Tim Bennett's video tutorial: Libor: Britain's most important interest rate.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
Where are ISA savers and investors putting their money?
With less than three months until the end of the tax year, where are ISA savers and investors putting their money? We look at the latest ISA trends.
By Katie Williams Published
-
More than £53 billion held in fixed-rate cash ISAs will mature by April - where should savers move their money?
If your fixed-rate cash ISA is maturing soon, we look at the options available to you
By Ruth Emery Published