London Interbank Bid Rate (LIBID)

Definition

The London Interbank Bid Rate (LIBID) represents the rate of interest at which major banks in the London interbank market are willing to bid for deposits from one another. It’s essentially the rate at which banks are prepared to borrow funds from other banks. LIBID, alongside LIBOR (London Interbank Offered Rate), is a crucial benchmark for financial markets, helping to gauge the health of the credit market and the cost of borrowing.

Examples

Example 1: Short-Term Corporate Loans
- A corporation might prefer borrowing using an instrument pegged to LIBID if it expects borrowing rates to fall. For instance, a company might take out a loan referenced against the LIBID when engaging in short-term borrowing to keep production running.
Example 2: Financial Market Instruments
- A financial institution might choose to invest in high-yield instruments based on the LIBID if it anticipates a robust interbank lending environment where borrowing is cheaper and liquidity is ample.

Frequently Asked Questions (FAQs)

Q1: What is the primary difference between LIBID and LIBOR?

A1: The primary difference is that LIBID is the rate at which banks are willing to borrow funds, while LIBOR is the rate at which they are willing to lend funds to other banks.

Q2: How is LIBID calculated?

A2: LIBID is calculated similarly to LIBOR but generally represents a lower rate since banks’ borrowing rates are often less than their lending rates. It’s derived from the bid quotes provided by a panel of banks.

Q3: Why is LIBID important?

A3: LIBID is an essential tool for financial institutions as it helps determine the cost of borrowing short-term funds and reflects the creditworthiness of the interbank market.

Q4: How frequently is LIBID updated?

A4: LIBID is updated at the same frequency as LIBOR, typically on a daily basis.

Q5: Is LIBID still in use following LIBOR’s phase-out?

A5: Following the phase-out of LIBOR, many financial systems have migrated to alternative reference rates. It is likely that LIBID, closely tied to LIBOR, has experienced similar transitions or adjustments.

London Interbank Offered Rate (LIBOR): The rate at which banks offer to lend funds to one another in the interbank market.
Overnight Rate: The interest rate at which a depository institution lends immediately available funds to another depository institution overnight.
Prime Rate: The interest rate that commercial banks charge their most credit-worthy customers.
Euribor (Euro Interbank Offered Rate): Similar to LIBOR, it is the rate at which European banks offer to lend unsecured funds to other banks in the eurozone interbank market.
Federal Funds Rate: The interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight.

Online References

Investopedia on LIBID: LIBID Definition
The Balance: Understanding LIBID
Bloomberg: LIBID Information

Suggested Books for Further Studies

“Financial Markets and Institutions” by Frederic S. Mishkin
- This book provides an in-depth look at the operations in financial markets and institutions.
“Fixed Income Markets and Their Derivatives” by Suresh M. Sundaresan
- A comprehensive guide to understanding fixed-income markets, including benchmark rates like LIBID and LIBOR.
“The Handbook of Fixed Income Securities” edited by Frank J. Fabozzi
- An essential manual for understanding various facets of fixed-income securities, including interest rate benchmarks.

Accounting Basics: “London Interbank Bid Rate (LIBID)” Fundamentals Quiz

### What does LIBID represent? - [x] The interest rate at which banks are willing to borrow from each other. - [ ] The interest rate at which banks are willing to lend to each other. - [ ] The rate set by central banks for overnight borrowing. - [ ] The interest rate available to individual borrowers from retail banks. > **Explanation:** LIBID is the rate at which major banks bid for deposits from other banks, essentially showing the interest rate they're willing to pay to borrow funds in the interbank market. ### How often is LIBID typically updated? - [ ] Weekly - [ ] Monthly - [x] Daily - [ ] Annually > **Explanation:** LIBID, like its counterpart LIBOR, is generally updated on a daily basis to reflect current market conditions. ### What relationship does LIBID have with LIBOR? - [ ] LIBID is typically higher than LIBOR. - [x] LIBID is typically lower than LIBOR. - [ ] LIBID and LIBOR are always equal. - [ ] LIBID only applies to long-term loans. > **Explanation:** LIBID is typically lower than LIBOR because borrowing rates (LIBID) tend to be lower than lending rates (LIBOR). ### Which market does LIBID pertain to? - [ ] Stock market - [ ] Retail banking - [ ] Mortgage market - [x] Interbank market > **Explanation:** LIBID pertains to the interbank market where banks lend to and borrow from each other. ### With the phase-out of LIBOR, what is likely to happen to LIBID? - [x] It is likely to experience similar transitions or adjustments. - [ ] It will be completely unaffected. - [ ] It will replace LIBOR as the main reference rate. - [ ] It will be exclusively used for all new financial contracts. > **Explanation:** Since LIBID is closely tied to LIBOR, its computation and usage are likely to undergo transitions aligned with the replacement or adjustments to LIBOR. ### Why do financial institutions consider LIBID important? - [ ] It determines financial news reporting. - [ ] It reflects the index of stock prices. - [x] It helps determine the cost of borrowing short-term funds. - [ ] It sets the consumer loan rates. > **Explanation:** LIBID is essential for financial institutions as it helps determine the cost of borrowing short-term funds in the interbank market. ### How is LIBID derived? - [ ] Through central bank directives. - [x] From bid quotes provided by a panel of banks. - [ ] Based on consumer interest rates. - [ ] Calculated by stock market performance. > **Explanation:** LIBID is derived from the bid quotes provided by a panel of banks, unlike central bank-set rates. ### What does the bid in LIBID signify? - [ ] A formal offer to sell securities. - [x] A declaration to borrow at a specified rate. - [ ] A request for consumer loans. - [ ] An estimate of future inflation rates. > **Explanation:** The "bid" in LIBID signifies the banks' willingness to borrow funds at a given interest rate. ### To which type of market instrument is LIBID most related? - [ ] Long-term government bonds - [x] Short-term financial instruments - [ ] Retail bank savings accounts - [ ] Equity shares > **Explanation:** LIBID is closely related to short-term financial instruments within the interbank market as it reflects short-term borrowing costs between banks. ### What feature of LIBID makes it useful for understanding credit markets? - [ ] Its generalization for retail rates. - [ ] Its issuance solely by central banks. - [x] Its reflection of interbank borrowing conditions. - [ ] Its utility in stock market predictions. > **Explanation:** LIBID is useful for understanding credit markets as it reflects the conditions for interbank borrowing, which provides insights into the liquidity and risk levels in the market.

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