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The LIBOR Index

LIBOR stands for London Inter-Bank Offered Rate and is the interest rate at which highly rated American and International banks lend to one another. The LIBOR is an index that follows international economic conditions. There are various maturities associated with the LIBOR, including 1-month, 3-month, 6-month and 1-year.

Use of LIBOR indices has increased due to the U.S. Treasury Department's decision to stop issuing shorter-term bonds like the One-Year Treasury bill in an effort to cut government costs. The LIBOR has proven to be the most popular substitute to the US Treasury bill for Adjustable Rate Mortgages (ARMs).

LIBOR-indexed ARMs offer aggressive initial rates. Borrowers are also protected from interest rate fluctuations by both periodic and lifetime interest rate caps.