LIBOR and LIBID

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Permalink Reply by David Smart on January 29, 2010 at 11:14am

Hi Cosp,

When dealing with fixed income - a higher interest rate would imply a lower market price for the underlying security.

Combine that with the fact that dealers would, ideally, buy low and sell high.

Regards

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Permalink Reply by cosp on January 29, 2010 at 5:25pm

Thanks David. Generally, this is true from asset pricing theory (interest rate is inversely related with price). I also understand that banks will buy deposits from the public at a lower price and lend to other banks on the inter-bank market at a higher price to realize spread. Thank you.

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Permalink Reply by Sachidanand (Sacha) Singh on February 4, 2010 at 8:25am

Thanks, David.

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Permalink Reply by Amit Puggal on January 29, 2010 at 5:30pm

It can be seen as LIBID rate is borrowing rate and LIBOR is lending rate and it can also be seen as ASK and BID rate for Currency Trading....

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Permalink Reply by pardeep on February 3, 2010 at 9:32am

LIBOR is a rate at which a lend deposits to another bank and LIBID is a rate at which it borrows from other.thus to gentrate sufficent revenue for the banks LIBOR is kept higher then LIBID

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Permalink Reply by Chetan Ganatra on February 8, 2010 at 9:20am

the Difference is the margin for financial institutions.

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Permalink Reply by Sunder R Chava on February 8, 2010 at 1:23pm

Libor is the London interbank offered rate, the rate at which banksoffer to lend funds in this market.
And Libid is the London interbank bid rate, the rate that abank is willing to pay for funds in the international interbank market. So when you lend it is at a higher rate that is why Libor should be higher that Libid.

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Permalink Reply by rajate on February 9, 2010 at 1:58am

Thanks for the explaination. Its easy to understand now.

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Permalink Reply by Chirag Mehta on February 8, 2010 at 1:28pm

Libor is the rate at which banks in London offer a loan and Libid is the rate at which they accept deposits(to talk in simple lend and deposit language),so its is implied that a bank will lend at a higher rate and accept deposit at a lower rate of interest.Also the difference between the Libor and Libid is call Spread.

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Permalink Reply by GURVINDER SINGH KHARBANDA on February 8, 2010 at 2:06pm

LIBOR IS THE RATE AT WHICH THE BANK IS WILLING TO LEND AND THE LIBID IS THE RATE AT WHICH IT IS WILLING TO BORROW FUNDS. LIBID THEREFORE HAS TO BE LITTLE LESS THAN THE LIBOR RATE.

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Permalink Reply by Jerry Lawson on February 10, 2010 at 5:34am

The spread is the result of having an offer rate and a bid rate and this is how the banks are able to profit from the transaction. It is therefore essential to fix the offer price slightly above the bid price to achieve that aim.

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Permalink Reply by Santosh Nair on February 10, 2010 at 11:18pm

Iam thinking aloud at one aspect of it to seek better clarity with regard to this Libor and Libid:
Libor is London Inter-bank Offer Rate and Libid is London Inter-bank Bid Rate. Libor is always higher than Libid. If banks use Libor to lend (ask) and Libid to buy (bid) how come that while one bank expects to get a higher rate while lending hope to get a lower rate while borrowing? While one bank buys the other sells; while it is a bid rate to one it is offer rate to the other! How is it that this market function? Is it because the bid rate is expected to decrease within a day and the offer rate expected to increase simultaneously to keep-up with the margins in the inter-bank market?

I request someone to shed light upon this aspect of London Interbank Market. Somebody quoted an example of FX Currency market here: well in the case of currency market the rate is more applicable to retail customers and people who are not market makers in the FX market. Is it then that London Inter-bank market too is a market open to people who are not banking companies to engage in borrowing and lending of funds? Borrow from whom and lend to whom? Corporates, other banking companies, other financial institutions, societies etc....

Santosh Nair

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