What is Euribor?
Euribor (Euro Interbank Offered Rate) is an important benchmark interest rate in the Eurozone, representing the average rate at which European banks are willing to lend unsecured funds to one another in the wholesale money market (or interbank market). It is a reference rate published daily by the European Money Markets Institute (EMMI) based on the average interest rates reported by a panel of around 20-40 European banks.
Euribor serves a vital role in the financial system as it impacts a wide range of financial products, including savings accounts, mortgages, loans, and derivatives.
Examples
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Mortgages: Many European mortgages have interest rates that are tied to Euribor, which means changes in Euribor directly affect the interest costs of these mortgages.
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Corporate Loans: For large corporations engaging in financial activities, loan interest rates are often pegged to Euribor, impacting their borrowing costs.
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Savings Accounts: Some savings accounts offer interest rates that are linked to Euribor, influencing the returns individuals receive on their deposits.
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Derivatives: Futures contracts, swaps, and other derivatives may be based on Euribor rates to hedge or speculate on interest rate movements.
Frequently Asked Questions
What is the European Money Markets Institute (EMMI)?
The European Money Markets Institute (EMMI) is an organization responsible for administrating various Euribor benchmarks and ensuring their accuracy and reliability.
How is Euribor calculated?
Euribor is calculated based on the average interest rates at which panel banks report they are willing to lend to one another. Outliers in the reported rates are excluded to prevent skewing the average, and then the resulting rates are published daily.
What is the difference between Euribor and EONIA?
Euribor represents the average lending rates over different maturities ranging from one week to one year, while EONIA (Euro OverNight Index Average) represents the average overnight lending rate in the Eurozone.
How does Euribor affect consumers?
Consumers are affected by Euribor indirectly through products like mortgages, loans, and savings accounts that have interest rates tied to Euribor. For instance, a rise in Euribor can lead to higher mortgage payments.
Can Euribor be negative?
Yes, Euribor can and has been negative during periods when central banks implement negative interest rate policies to stimulate the economy.
Related Terms
- LIBOR (London Interbank Offered Rate): A globally recognized benchmark interest rate used to indicate borrowing costs between banks, similar to Euribor but in the London interbank market.
- EONIA (Euro OverNight Index Average): An effective overnight interest rate computed from overnight transactions in the Eurozone, closely related to Euribor.
- Interest Rate Swap: A financial derivative in which two parties exchange interest rate payments; can be based on different floating rates like Euribor.
- Reference Rate: A benchmark rate used to set other interest rates in financial instruments.
Online References
- European Money Markets Institute (EMMI)
- European Central Bank (ECB) Euribor rates
- Investopedia on Euribor
Suggested Books for Further Studies
- “Interest Rate Derivatives Explained: Volume 1: Products and Markets” by J. Kienitz and D. Wetterau
- “Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman and Angel Serrat
- “The Handbook of European Fixed Income Securities” by Frank Fabozzi, Steven Mann
Accounting Basics: Euribor Fundamentals Quiz
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