What it means
The London interbank market was where banks lent short-term money to one another. Two quoted rates came out of it: LIBOR (London Interbank Offered Rate), the rate at which banks offered to lend, and LIBID (London Interbank Bid Rate), the rate at which they were prepared to take deposits.
Because banks lend at a higher rate than they borrow, LIBOR was always at or above LIBID. Limean was the midpoint of the two, so it represented the middle of the market.
A lender setting the rate on a floating loan or a deposit could use it to avoid favouring either side. Some contracts, such as certain floating rate notes and swaps, referred to it for exactly that reason.
The usual pricing structure added a fixed margin to a benchmark and reset the total at regular intervals. A loan priced at Limean plus 1.5% would pay the average interbank rate for the period plus 1.5 percentage points.
The margin reflected the borrower's credit risk, and the benchmark reflected the general cost of money. LIBOR and the related London rates were phased out after concerns about manipulation and a lack of real transactions behind the quotes.
Most markets have moved to overnight risk-free rates, which are based on actual transactions and are published by central banks or other administrators. Contracts that referenced the old rates were amended or converted using fallback provisions.
Finance staff still meet the term in older contracts, textbooks and historical data. When reviewing an agreement that mentions Limean, the key questions are which benchmark replaced the original, what adjustment was agreed to bridge the difference and whether the fallback wording was ever triggered.
Historical analysis is the other reason to know the term. Researchers comparing old interest rates sometimes use the mean series because it smooths the gap between bid and offer and approximates the true market rate.
When using historical data, check which series was used and whether the figures are for the same maturity.
In practice
Real-world examples.
Example
A manufacturer in the early 2000s borrows $5,000,000 under a floating rate loan priced at Limean plus 1.25%. Every six months the bank takes the published LIBID and LIBOR, averages them and resets the rate. The treasurer budgets interest using the latest reset.
Example
A fund holds a floating rate note that pays Limean plus 0.40%. The fund's accountant records each coupon using the average of the two quoted rates on the reset date. When the benchmark is retired, the note is amended to use a replacement rate and a fixed adjustment.
Example
A risk analyst reviews an old swap agreement that refers to Limean in its definitions. She checks whether the fallback clause switches the contract to a successor rate. The legal team confirms the replacement and the adjustment margin.
Formula
Calculation
Limean = (LIBID + LIBOR) / 2
Suppose that for a given period LIBOR was 5.20% and LIBID was 5.00%. Limean was (5.00 + 5.20) / 2 = 5.10%. A company with a $2,000,000 floating loan priced at Limean plus 1.50% would pay 5.10% + 1.50% = 6.60%. Annual interest would be 2,000,000 x 0.066 = $132,000.Case study
Seen in the real world.
Ashford Marine Services is an illustrative, fictional ship repair company with a $12,000,000 term loan priced at Limean plus 1.8%. When the lender announced the end of the London benchmark, the finance director worried that the loan would become unworkable or that the cost would jump. She asked the bank for its proposed replacement.
The bank offered a replacement based on an overnight risk-free rate plus a fixed spread adjustment designed to match the old average. The finance director tested the new terms against the last two years of Limean data and found the cost was within an illustrative $4,000 a year of what would have been paid. She signed the amendment and added a review of benchmark wording to the company's contract checklist.
Watch out
Common mistakes.
- Assuming Limean is the same as LIBOR, when it is the average of the bid and offered rates and so sits below LIBOR.
- Pricing a new floating rate contract off a retired benchmark instead of its replacement.
- Ignoring the spread adjustment when converting an old contract, which can shift the cost for the borrower or the lender.
Questions
People also ask.
Is Limean still published?
The London benchmarks it relied on have been retired in most markets, so new contracts normally use risk-free rate alternatives.
What is the difference between LIBID and LIBOR?
LIBID is the rate at which banks would borrow, or bid for deposits, while LIBOR is the rate at which they would lend, or offer funds.
Why use the mean of the two rates?
It gave a neutral midpoint, so neither borrower nor lender was seen as getting the better side of the market.
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