What is Six-month LIBOR?

A

Six-month LIBOR (London Interbank Offered Rate) is an interest rate widely used as a benchmark for short-term interest rates in financial markets. It represents the average interest rate at which a panel of banks in London is willing to lend funds to each other in the interbank market for a six-month period.

Now let's break down the provided answer choices:

A. Represents the interest rate paid on a CD that matures in 6 months: This answer is incorrect. Six-month LIBOR is not specifically related to a certificate of deposit (CD) that matures in six months. CD rates are typically determined by factors such as prevailing market rates and the creditworthiness of the issuing institution.

B. Is the return available on the shortest term euro-denominated securities: This answer is also incorrect. Six-month LIBOR is not directly related to euro-denominated securities. LIBOR is an interbank lending rate and serves as a benchmark for various financial products and contracts, including loans, bonds, derivatives, and more. It does not represent the return on any specific security.

C. Is determined by adding a small spread to the yield available on a UK government bond maturing in 6 months: This answer is incorrect as well. Six-month LIBOR is not directly tied to the yield of a specific government bond, such as a UK government bond. While government bond yields can influence interest rates in general, LIBOR is determined based on the rates at which banks lend to each other and does not have a direct link to government bonds.

To summarize, none of the provided answer choices accurately describe the nature and determination of six-month LIBOR. It is an interbank lending rate representing the average interest rate at which banks in London lend funds to each other for a six-month period. It serves as a benchmark for short-term interest rates and is used in various financial transactions and contracts.