LOS 58.E: DESCRIBE THE CHARACTERISTIC OF EURODOLLAR TIME DEPOSIT MARKET AND DEFINE LIBOR AND EURIBOR;

Question 1

LOS 58.E: DESCRIBE THE CHARACTERISTIC OF EURODOLLAR TIME DEPOSIT MARKET AND DEFINE LIBOR AND EURIBOR;

Answer 1

• LIBOR – London Interbank Offer Rate – rate Large London banks lend to each
other
• Euribor – Euro Interbank Offer Rate – unsecured loans to other banks in euros
• Eurodollar – deposits denominated in US dollars outside the US, thus not
under the jurisdiction of the Federal Reserve.
• Time deposits for longer periods are like the yield curve.

Question 2

Characteristics of ‘Eurodollar Time Deposit Market’

Answer 2

“The primary time deposit instrument is called the Eurodollar, which is a dollar deposited outside the United States. Banks borrow dollars from other banks by issuing Eurodollar time deposits, which are essentially short-term unsecured loans. In London, the rate on such dollar loans is called the London Interbank Rate. Although there are rates for both borrowing and lending, in the financial markets the lending rate, called the London Interbank Offered Rate (LIBOR), is more commonly used in derivative contracts.”

“Eurodollar time deposits are dollar loans made by one bank to another. Although the term “Eurodollars” refers to dollar-denominated loans, similar loans exist in other currencies. Eurodollar deposits accrue interest by adding it on to the principal, using a 360-day year assumption. The primary Eurodollar rate is called LIBOR.”

Question 3

Libor Definition

Answer 3

LIBOR stands for London Interbank Offer Rate, the rate at which London banks are willing to lend to other London banks.

Question 4

Euribor Definition

Answer 4

Euribor is the rate on a euro time deposit, a loan made by banks to other banks in Frankfurt in which the currency is the euro.