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HMRC internal manual

International Manual

Thin capitalisation: practical guidance: interest cover - debt servicing: LIBOR (London Interbank Offered Rate)

Floating interest rates are often expressed in terms of LIBO(R plus, say “LIBOR + 250 basis points”. LIBOR is a widely used reference rate, one of a number of rates by reference to which floating interest rates are defined.

A basis point provides a simple way of measuring an interest rate (or a movement in an interest rate). It represents one hundredth of a percentage point, so 100 basis points is 1%, and 250 basis points are 2.5%. It is easier, or at least more elegant, to talk about 30 basis points than “point three (of a) per cent”. The addition of a number of basis points to a rate like LIBOR is referred to as the “margin over LIBOR”.

LIBOR represents the lowest rate at which the leading London banks could borrow unsecured just before 11 a.m. on a given day. The participating banks submit their own rates, which are then put together and averaged out for each currency and each maturity.

LIBOR rates are published for each banking day for ten currencies and fifteen different maturities, from an overnight rate to a rate for twelve months. The rates are all expressed in an annualised form, and are published by the British Bankers’ Association (the BBA).

LIBOR is a London-based measure, not specifically a sterling measure. LIBOR rates are also quoted for nine other currencies. EURIBOR - the European Interbank Offered Rate operates in much the same way for the euro wholesale market (having merged a number of European domestic rates upon Monetary Union), but LIBOR is used as the primary benchmark for floating interest rates

LIBOR sometimes gets confused with base rate, which is set by the Bank of England and represents the rate at which it will lend to banking institutions. Base rate is not normally accepted as a reference rate for calculating interest rates; it is too narrow to reflect a commercial borrowing rate

BBA LIBOR now has its own website at , with limited access to data. Historic rates are available within HMRC via the Transfer Pricing Group home page on the intranet.