Libor and basis points ,what does it mean to quote libor with 500 basis points and libor floor ?
what does it mean to quote LIBOR with 500 basis points and libor floor and how do I calculate this?
LIBOR + 500bps is a floating rate in loan. Typically you are quoted 3M Libor (roughly 1.35% right now) + spread (500bps = 5%). This rate is floating because 3M Libor can change over time.
A floor is essentially like a put option but on the Libor rate. If you are the receiver of the 3ML+500bps and you want to hedge in the case 3ML goes down in the future, you would enter a floor. If the Libor falls below the predefined rate of your floor, you can exercise the floorlet and receive the spread between 3M Libor and the exercise rate of the floor.
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