Libor Question

R

rossmedia

Assume a strategy's gross return is designed to deduct the money would have earned if it was not invested and instead sat in a bank earning the current LIBOR monthly rate.

Follow the link below (It's a chart of historical LIBOR) and tell me what would have been the return for an investment that earned 3% in Jan of 2001 after you deduct the monthly LIBOR.

http://www.moneycafe.com/library/1mlibor.htm

Thanks.

R
 
Is this a trick question?

5.622% Jan 01 LIBOR
3.000% Stated Return after LIBOR Adjustment
= 8.622% Gross return

Gross return was 8.622% less the LIBOR if I read what you asked correctly.

Jack
 
Jack,

No it's not a trick question at all. A serious one actually. So are you saying that my return would actually be -2.622 if adjusted for LIBOR that month (which is what I meant in my first question, deduct libor from return to get my net).

That means someone with 10mm cash could have earned over 5% in Jan 2001 or 500k+ just on a LIBOR rate alone.

Is that correct? What am I missing?

R
 
Quote from rossmedia:

That means someone with 10mm cash could have earned over 5% in Jan 2001 or 500k+ just on a LIBOR rate alone.

Is that correct? What am I missing?
More...
The libor rate, like all interest rates are expressed in annual terms. You don't get 5% interest for one month - you get (5/12) =~ .42%
 
OK - Your example really meant your actual return month over month was XXX %. You'd then adjust it for the annualized LIBOR rate so you'd lower the return by about .4%.

Jack
 
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