{"id":1773,"date":"2019-09-27T13:33:00","date_gmt":"2019-09-27T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1773"},"modified":"2025-12-30T12:10:48","modified_gmt":"2025-12-30T12:10:48","slug":"interbank-offered-rates","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/fixed-income\/interbank-offered-rates\/","title":{"rendered":"Interbank Offered Rates"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Fixed-Income Markets: Issuance, Trading and Funding (2025 Level I CFA\u00ae Exam \u2013 Fixed Income\u2013Module 2)\",\n  \"description\": \"This CFA Level I video explains global fixed-income markets, covering bond classifications, interbank offered rates, primary and secondary bond markets, and securities from sovereign and non-sovereign entities. It also reviews corporate debt, structured financial instruments, short-term bank funding options, and the mechanics and risks of repurchase agreements (repos).\",\n  \"uploadDate\": \"2022-05-20T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/l7RAt_PtF9g\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=l7RAt_PtF9g\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/l7RAt_PtF9g\",\n  \"duration\": \"PT48M15S\"\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"For a floating-rate bond, the coupon rate is the 3-month LIBOR plus a given spread. The coupon payments are likely to decrease if the:\",\n    \"text\": \"Question\\nFor a floating-rate bond, the coupon rate is the 3-month LIBOR plus a given spread. The coupon payments are likely to decrease if the:\\n\\nA. LIBOR decreases.\\nB. Spread decreases.\\nC. Company\u2019s credit quality increases.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A. The coupon rate is based on LIBOR, and if LIBOR decreases, the coupon payments will decrease accordingly. The spread is usually fixed and does not change unless renegotiated.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/l7RAt_PtF9g?si=Z4wqP6xVOzkV_-vB\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n<h2><strong>Floating Rate Bonds<\/strong><\/h2>\n<p>A floating rate bond is expressed as a reference rate plus a spread or margin. The spread is usually fixed, remains constant until maturity, and it is primarily a function of the issuer&#8217;s credit quality. The coupon rate adjusts to the level of market interest rates depending on the reference rate.<\/p>\n<h2><strong>LIBOR<\/strong><\/h2>\n<p>The London InterBank Offered Rate (LIBOR) is the reference rate for many floating bonds. For floating-rate bonds denominated in US dollars, the reference rate is the US dollar LIBOR and 3-month LIBOR if the coupons are paid quarterly. LIBOR rates reflect the rates at which multiple banks believe they could borrow unsecured funds from one another. Historically, LIBOR rates were set by the British Bankers\u2019 Association (BBA).<\/p>\n<p>The major advantage of the LIBOR is its prevalence of use. However, its main disadvantage is its dependence on the banks&#8217; own estimates of their borrowing rates.<\/p>\n<p>The interest on a floating-rate debt is calculated as the reference rate (usually the LIBOR) plus a spread. The spread is a function of the issuer\u2019s credit quality. For example, a stable AAA-rated financial institution will have a spread of 0.5-2%, whereas a riskier issuer will have a higher spread.<\/p>\n<h2><strong>Fixed Income Indexes<\/strong><\/h2>\n<p>Fixed income indexes describe a given bond market or sector to measure and report performance. For example, Barclays\u2019 Capital Global Aggregate Bond Index represents a broad global investment-grade fixed-rate bond market with 3 components: US, Pan-European, and Asian-Pacific Aggregate Bond Indexes.<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>For a floating-rate bond, the coupon rate is the 3-month LIBOR plus a given spread. The coupon payments are likely to decrease if the:<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">LIBOR decreases.<\/li>\n<li data-tadv-p=\"keep\">Spread decreases.<\/li>\n<li data-tadv-p=\"keep\">Company&#8217;s credit quality increases.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>The\u00a0LIBOR is the only component that is subject to change.<\/p>\n<p>Options B and C are incorrect. The spread is usually fixed and remains constant until maturity and is primarily a function of the issuer&#8217;s credit quality.<\/p>\n<\/blockquote>","protected":false},"excerpt":{"rendered":"<p>Floating Rate Bonds A floating rate bond is expressed as a reference rate plus a spread or margin. The spread is usually fixed, remains constant until maturity, and it is primarily a function of the issuer&#8217;s credit quality. The coupon&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[9],"tags":[],"class_list":["post-1773","post","type-post","status-publish","format-standard","hentry","category-fixed-income","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Interbank Offered Rates &amp; Floating Bonds | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Understand interbank offered rates, LIBOR, and floating-rate bonds. 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