Association for Financial Professionals (AFP) Practice Exam

Which of the following is a potential base rate for the all-in rate?

1. London Interbank Offered Rate (LIBOR)

2. Eurobond rate

3. Both London Interbank Offered Rate (LIBOR) and Eurobond rate

4. None of the above

The correct answer is: London Interbank Offered Rate (LIBOR)

The London Interbank Offered Rate (LIBOR) is a widely recognized benchmark interest rate used in the international financial markets. It represents the average rate at which major global banks lend to one another in the short term. Because LIBOR serves as an important reference point for pricing loans, derivatives, and other financial instruments, it can effectively serve as a potential base rate for the all-in rate. The all-in rate typically includes not just the base rate, but also additional margins and fees associated with borrowing. In contrast, while the Eurobond rate is a significant component in the realm of international finance, it is generally used for debt instruments issued in the Eurobond market and does not serve as an established base rate like LIBOR. Therefore, it is not typically used to determine the all-in rate for standard lending scenarios. This understanding reinforces why the London Interbank Offered Rate (LIBOR) stands out as the most appropriate choice for a potential base rate in the context of calculating the all-in rate.