LIBOR as a Discount Rate and Interpolating Short-Term Rates

Summary

The document asks whether USD LIBOR can serve as a spot rate for discounting and whether a rate for a 16-day interbank loan can be estimated from overnight and one-month LIBOR. The answer emphasizes that suitability for discounting depends on the cash flows or instrument being valued; there is no universal yes-or-no answer detached from that context.

For the short-term rate question, the response treats interpolation between overnight and one-month rates as a reasonable estimate for a loan with an intermediate tenor. It gives no interpolation formula, market data, or validation, so the suggestion is a practical approximation rather than a demonstrated pricing method. The discussion is brief and leaves the choice of discount curve and the risks of the estimate unspecified.

Key ideas

• Whether LIBOR is an appropriate discount rate depends on what is being discounted.
• An intermediate-tenor interbank loan rate may be reasonably estimated from overnight and one-month rates.
• The document gives no specific interpolation method or empirical test for that estimate.
• Discounting choices should be tied to the instrument and cash flows under consideration.

Tags

# Is LIBOR a spot rate?


# Is LIBOR a spot rate?












Can we use USD LIBOR as spot rates for discounting?

If we have overnight LIBOR and say 1 month LIBOR how to compute 16 day LIBOR? Can we do interpolation?

## Answer by dm63 (score 3)

https://quant.stackexchange.com/a/34823

First question can't be answered without knowing what you are discounting.

Second question you are asking whether the rate of a 16 day interbank loan can be obtained from interpolating an overnight rate and a 1 month bank loan. I would say it is a reasonable guess.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.