Inter Bank Offered Rate (IBOR)

Definition

The Inter Bank Offered Rate (IBOR) is an average interest rate calculated from the rates at which several banks on the interbank market are willing to lend to each other. It is used as a reference rate for numerous financial instruments, including mortgages, loans, and interest rate swaps.

Examples

LIBOR (London Interbank Offered Rate): Perhaps the most well-known IBOR, LIBOR was previously used for a vast range of financial products globally until its phase-out in 2021.
EURIBOR (Euro Interbank Offered Rate): This rate is used for the euro currency and serves as a critical reference for interest rates within the Eurozone.
TIBOR (Tokyo Interbank Offered Rate): This is a reference rate for the Japanese Yen, important for financial transactions in Japan.

Frequently Asked Questions

What is the purpose of IBOR?

IBOR serves as a benchmark for the interest rates at which banks lend to each other on the interbank market. It reflects the cost of unsecured borrowing between major banks and is used as a reference for setting other financial instruments’ interest rates.

How is IBOR calculated?

Each participating bank submits their suggested interest rates, and then the highest and lowest values are excluded. The remaining rates are averaged to determine the IBOR.

Why is IBOR being replaced?

IBOR is being phased out in favor of risk-free rates (RFRs) due to concerns about market manipulation and the reduced volume of interbank lending, which makes the rates less reliable.

What are some examples of replacement rates for IBOR?

Some replacement rates include:

SOFR (Secured Overnight Financing Rate) in the United States
SONIA (Sterling Overnight Index Average) in the United Kingdom
ESTR (Euro Short-Term Rate) in the Eurozone

How will the transition from IBOR affect financial contracts?

Contracts referring to IBOR will need to be updated to reference the new risk-free rates. This process requires careful consideration, legal review, and sometimes renegotiation between parties.

LIBOR (London Interbank Offered Rate): A specific type of IBOR that was extensively used for pricing financial contracts.
SONIA (Sterling Overnight Index Average): A replacement for GBP LIBOR, focusing on overnight funding rates.
SOFR (Secured Overnight Financing Rate): A replacement for USD LIBOR, based on the cost of overnight loans backed by U.S. Treasury securities.
Interbank Market: The market where banks lend to and borrow from one another, typically on an unsecured basis.
Risk-Free Rates (RFRs): Overnight interest rates based on actual transactional data, designed to replace IBOR benchmarks.

Online References

Suggested Books for Further Studies

“Interest Rate Markets: A Practical Approach to Fixed Income” by Siddhartha Jha: This book provides an in-depth understanding of interest rate markets, including benchmarks like IBOR.
“The Handbook of Fixed Income Securities” edited by Frank J. Fabozzi: An authoritative text on fixed income markets and instruments, touching upon rates like IBOR.
“Interest Rate Swaps and Other Derivatives” by Howard Corb: This book covers the use of interest rate swaps and includes discussions on benchmarks like IBOR.

Accounting Basics: “Inter Bank Offered Rate (IBOR)” Fundamentals Quiz

### What does IBOR stand for? - [x] Inter Bank Offered Rate - [ ] International Bank Offered Rate - [ ] Internet Bank Offered Rate - [ ] Indexed Bank Offered Rate > **Explanation:** IBOR stands for Inter Bank Offered Rate, a critical benchmark for the rates at which banks lend to one another. ### What was the main reason for replacing LIBOR? - [ ] High administration costs - [x] Concerns about manipulation and reliability - [ ] Introduction of new currencies - [ ] Declining interest in banking markets > **Explanation:** LIBOR is being replaced primarily due to concerns about its manipulation and reduced reliability, leading to the adoption of more stable risk-free rates. ### Which rate is replacing USD LIBOR in the United States? - [ ] EURIBOR - [x] SOFR - [ ] TIBOR - [ ] ESTR > **Explanation:** The Secured Overnight Financing Rate (SOFR) is replacing USD LIBOR as the main benchmark for interest rates in the United States. ### Why is IBOR important in financial markets? - [ ] It's used for calculating bank fees. - [ ] It decides the stock market rates. - [x] It's a benchmark for many financial instruments. - [ ] It sets the consumer deposit rates. > **Explanation:** IBOR serves as a critical benchmark for pricing various financial instruments, including loans and interest rate swaps. ### What primarily differentiates IBOR from LIBOR? - [x] Geographic relevance and specific markets - [ ] The calculation method - [ ] Currency usage - [ ] Lending bank policies > **Explanation:** The term IBOR is a broader category that includes various interbank rates, with LIBOR being the specific one previously used widely across various regions and financial markets. ### What is the significance of excluding the highest and lowest values in IBOR calculation? - [ ] To speed up the calculation process - [ ] To align rates with other countries - [x] To remove outliers and enhance reliability - [ ] To follow regulatory mandates > **Explanation:** By excluding the highest and lowest interest rate submissions, IBOR calculations aim to remove outliers and obtain a more reliable average rate. ### Which entity currently oversees the transition away from LIBOR? - [x] Financial Conduct Authority (FCA) - [ ] United States Federal Reserve - [ ] International Monetary Fund (IMF) - [ ] European Central Bank (ECB) > **Explanation:** The Financial Conduct Authority (FCA) oversees the transition away from LIBOR, guiding the market towards adopting new risk-free rates. ### What type of market activity provides the data basis for SOFR? - [ ] Unsecured lending between large banks - [x] Secured overnight transactions backed by U.S. Treasury securities - [ ] Foreign exchange trading - [ ] Mortgage lending rates > **Explanation:** SOFR is derived from the costs of secured overnight transactions that are backed by U.S. Treasury securities, ensuring a stable reference rate. ### What rate is used as a reference in the Eurozone to replace EURIBOR? - [ ] SONIA - [ ] TANBOR - [ ] IBOR2.0 - [x] ESTR > **Explanation:** The Euro Short-Term Rate (ESTR) is replacing EURIBOR as the reference rate within the Eurozone. ### Why are risk-free rates considered more reliable than IBOR? - [ ] They are easier to calculate. - [x] They are based on actual transaction data rather than estimates. - [ ] They are backed by international banks only. - [ ] They do not fluctuate with market conditions. > **Explanation:** Risk-free rates are considered more reliable as they are derived from actual overnight transaction data rather than being based on estimates submitted by banks.

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