ACCA Financial Management (F9) Certification Practice Exam

What is LIBOR?

1. The stock market index in Europe

2. The interest rate charged by London banks on loans to other London banks

3. A bond market rate in the UK

4. A savings rate for individuals in London banks

The correct answer is: The interest rate charged by London banks on loans to other London banks

LIBOR, which stands for the London Interbank Offered Rate, represents the average interest rate at which major global banks lend to one another in the international money market for short-term loans. It is a benchmark interest rate that is crucial for various financial instruments, including loans, derivatives, and bonds. The significance of LIBOR lies in its role as a reference point for pricing and evaluating financial products. It reflects the cost of borrowing funds in the interbank market and can indicate overall economic conditions. Financial institutions rely on LIBOR to set the interest rates for a variety of products, which can include adjustable-rate mortgages, corporate loans, and derivatives such as interest rate swaps. The other options provided do not accurately describe LIBOR. The stock market index in Europe refers to a measure of a stock market's performance rather than an interest rate. A bond market rate in the UK pertains to fixed-income securities and is not directly related to interbank lending rates. Lastly, a savings rate for individuals in London banks deals with deposit accounts rather than the lending rates among banks. Understanding LIBOR is essential for anyone involved in finance, as it influences a wide array of financial activities and is a key indicator of liquidity and credit risk in the market.