From the course: Economic Tips for Everyone

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LIBOR and SOFR

LIBOR and SOFR

From the course: Economic Tips for Everyone

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LIBOR and SOFR

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- Companies borrow money, and these loans, this debt, has an interest rate. The rate is made up of two parts, a risk-free rate based on the cost of money set by the central bank, and an interest rate based on the credit quality of the company. The risk-free cost of money has been historically linked to central bank rates as something called LIBOR, the London Inter-bank Offered Rate. The interest rate based on company quality is set by its creditors, like the bank making a loan or providing a credit revolver. The kind of corporate credit revolver that uses LIBOR as the risk-free rate is called LIBOR Plus, because it was LIBOR plus a rate impacted by credit quality. But there was a big scandal about how LIBOR was manipulated, so in the future, LIBOR will be replaced as the means of setting the risk-free rate. In the United States, the Federal Reserve US Central Bank voted in 2017 to use the Secured Overnight Financing…

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