This is a big one, and it is all about the LIBOR scandal....Just synced a 10mil loan for a client, and LIBOR was of course used. It's a massive basis for the financial industry. LIBOR plus is used in everything. This is serious stuff, especially when you have naughty bankers meddling and conspiring against the system.
This was a very serious matter.
To quote from HM Customs Office:
"For example, suppose that a company takes out a loan at a rate of interest equal to, say, LIBOR plus 0.1%, and suppose that LIBOR is 4.1% at the start of the loan. The rate is to be reset each quarter by reference to current 3-month LIBOR. Clearly the company runs the risk of increased funding costs if commercial interest rates rise. The company may want to ensure that its funding costs do not rise above a certain level, or it may want to pay in effect a fixed rate of interest.
Suppose on the other hand the company borrows at a fixed rate of 4.5% for two years. If LIBOR rises to 4.5% or above, it will be better off than if it had the floating rate loan. But if interest rates remain static or even fall, it risks being locked into borrowing at above market rates. It may want to hedge that possibility by entering into a derivative contract which will pay out if interest rates fall."
Thanks accountingdegree.net
