London Inter Bank Mean Rate (LIMEAN)
The London Inter Bank Mean Rate (LIMEAN) is the median average calculated between the London Inter Bank Offered Rate (LIBOR) and the London Inter Bank Bid Rate (LIBID). LIMEAN reflects the middle ground of what banks charge each other for short-term loans (LIBOR) and what they are prepared to pay for these deposits (LIBID). It is an important benchmark that helps in understanding the landscape of interbank lending in the London financial markets.
Examples
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Example 1: Calculating LIMEAN
Suppose the current LIBOR is set at 2.5% and the LIBID is at 2.0%. The LIMEAN would be the median value between these two rates.\[ \text{LIMEAN} = \frac{\text{LIBOR} + \text{LIBID}}{2} = \frac{2.5% + 2.0%}{2} = 2.25% \]
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Example 2: Using LIMEAN in Financial Instruments
An investment contract might use LIMEAN as a benchmark rate for determining the variable interest payments that are due on the principal amount borrowed. For instance, if a contract specifies an interest rate of “LIMEAN + 1%”, and the LIMEAN is 2.25%, the resulting interest rate for the period would be:\[ \text{Interest Rate} = \text{LIMEAN} + 1% = 2.25% + 1% = 3.25% \]
Frequently Asked Questions (FAQs)
Q1: What is the main difference between LIMEAN and LIBOR?
A1: While LIBOR is specifically the rate at which banks are willing to lend to each other, LIMEAN represents the median average between this lending rate (LIBOR) and the borrowing rate (LIBID).
Q2: How often is LIMEAN calculated?
A2: LIMEAN is typically calculated daily, although the specific frequency can depend on the financial institution or contract requirement utilizing this rate.
Q3: What financial products use LIMEAN as a benchmark?
A3: LIMEAN can be used in various financial products including derivatives, loans, and investment contracts.
Q4: Why is LIMEAN important in the financial industry?
A4: LIMEAN serves as a useful midpoint indicator of interbank lending costs, representing a balanced view of offered and bid rates and helping in the formulation of fair transaction rates in financial contracts.
Q5: Is LIMEAN still in use today?
A5: As financial markets evolve, the use of specific benchmarks such as LIMEAN can wane or transition to newer standards. Always refer to the latest industry guidelines and practices.
Related Terms
- LIBOR (London Inter Bank Offered Rate): The rate at which banks can borrow from each other.
- LIBID (London Inter Bank Bid Rate): The rate at which banks are willing to pay for deposits.
- Interbank Market: The financial system of trading assets and credit between banks.
- Benchmark Rate: A standard rate used to price loans, mortgages, and other financial products.
Online Resources
Suggested Books for Further Studies
- “Interest Rate Markets: A Practical Approach to Fixed Income” by Siddhartha Jha
- “The Handbook of Fixed Income Securities” by Frank J. Fabozzi
- “Fixed-Income Securities: Valuation, Risk, and Risk Management” by Pietro Veronesi
Accounting Basics: “London Inter Bank Mean Rate (LIMEAN)” Fundamentals Quiz
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