LOS j: Define LIBOR and explain its importance to funded investors who borrow short term.

Q1. A funded investor has a short-term investment returning a 7% return. The borrowing costs are 20 basis points above the reference rate. If the T-bill rate is 3% and the LIBOR rate is 3.5%, what is the investor’s current profit on this investment?

A)   3.8%.

B)   3.3%.

C)   1.5%.

Q2. The most important LIBOR rate for funded investors is the:

A)   20 year rate.

B)   1 year or less rate.

C)   10 year rate.

Q3. The interest rate paid on negotiable CDs by banks in London is referred to as:

A)   the Fed Funds rate.

B)   LIBOR.

C)   the London rate.

LOS j: Define LIBOR and explain its importance to funded investors who borrow short term.fficeffice" />

Q1. A funded investor has a short-term investment returning a 7% return. The borrowing costs are 20 basis points above the reference rate. If the T-bill rate is 3% and the LIBOR rate is 3.5%, what is the investor’s current profit on this investment?

A)   3.8%.

B)   3.3%.

C)   1.5%.

Correct answer is B)

A funded investor is one who borrows to invest. These investors typically borrow short-term and the interest rate on their loan is typically short-term LIBOR plus a margin, here LIBOR plus 20 basis points. Thus in this example, the investor’s cost of funds is 3.7%. His profit is then 7% ? 3.7% = 3.3%.

Q2. The most important LIBOR rate for funded investors is the:

A)   20 year rate.

B)   1 year or less rate.

C)   10 year rate.

Correct answer is B)

A funded investor is one who borrows to invest. These investors typically borrow short-term and the interest rate on their loan is typically short-term LIBOR plus a margin (e.g. LIBOR plus 30 basis points).

Q3. The interest rate paid on negotiable CDs by banks in ffice:smarttags" />London is referred to as:

A)   the Fed Funds rate.

B)   LIBOR.

C)   the London rate.

Correct answer is B)

The interest rate paid on negotiable CDs by banks in London is referred to as LIBOR. LIBOR is determined every day by the British Bankers Association. The Fed Funds rate is the rate paid on interbank loans within the U.S. The London rate is a fabricated term in this context.

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