It stands for London Interbank Offered Rate. It is the rate of interest at which AA-rated banks borrowed large amounts of money, in Eurodollar markets, for periods between 1 and 12 months from other banks. Before replacement, LIBOR was usually the base for other large loans offered to less creditworthy banks and institutions. This rate was not a risk-free rate, but it is close to it. For example, a non-investment-grade bank or a developing country bank may have had to pay LIBOR plus 2% when borrowing. The LIBOR used to be the most important interbank rate and is usually used as a reference rate for contracts. It used to be fixing daily in London, and is calculated from quotes provided by a number of participating banks.
By 2021-end, LIBOR will cease to exist in the market as a reference rate. At the time regulators decided to retire it, LIBOR was the benchmark rate for over US$350 trillion in financial contracts worldwide. During the transitional period, the market has developed alternatives which are mainly risk-free reference rates (RFRs) and will replace the LIBOR going forward. The two principal RFRs are the Secured Overnight Financing Rate (SOFR) (for US dollars) and Sterling Overnight Index Average (SONIA)(for sterling).
For more, see LIBOR (finance).
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