LIBOR Swap Rate Curve
- The London Inter-bank Offered Rate (LIBOR) is the U.S. dollar borrowing rate for high quality banks among one another, outside the U.S.
- Swap Rates: The fixed interest rate in a swap contract where two parties have agreed to exchange fixed rate and floating rate payments based on a notional principal.
- LIBOR is commonly used as the floating rate in swap agreements.
- LIBOR Swap Rate Curve: Rates at future time periods to convert fixed rates to floating rates and floating rates to fixed rates.
- The swap rate curve may be a better basis for the market yield curve than the government bond yields because:
- The swap market is not regulated by governments, so swap rates are more comparable across different countries where foreign and domestic investors may receive different tax treatment.
- The swap market may be unaffected by changes in demand for government bonds in the repurchase (or "repo") market.
- Theoretically, the swap curve reflects bank credit risk.
- The swap market has more maturities with which to construct a yield curve than the government bond market.