What it is:
prime rate in the United States, which is somewhat arbitrarily based on certain banks' lending costs plus a profit margin. Borrowers thus generally the use of LIBOR in interest-rate calculations because it represents a true rate. In general, LIBOR also tends to be below U.S. prime rates.
Frequently the interest rate on variable-rate corporate is based on LIBOR plus a spread. LIBOR is also commonly used as the underlying interest rate for derivative contracts.
How it works/Example:
Interbank rates are interest rates on short-term money by lending to another bank. The interest rate that the lending bank charges is called the interbank rate.
LIBOR rates are compiled by the British Bankers' Association (BBA) at 11 a.m. London time each business day, although the rates change throughout the day. To calculate rates, the BBA consults member banks, averages their rates and publishes the results. There are 15 different LIBOR rates, each corresponding to varying maturities up to one . The BBA also calculates LIBOR in nine currencies.