A corporation offers two bonds (3-yr and 5-yr) which, they say, are both based on the 6-month LIBOR rate at the time of issue "plus or minus a spread". The corporation insists that currently there is no spread. Yet the 3-yr annual interest rate is 5.1625%, and the
5-yr annual interest rate is 5.2125%.Doesn't that mean that there **must** be a spread for at least one of those bonds; otherwise, wouldn't both bonds have the same interest rate because they are based on the same LIBOR rate? Or do I have a fundamental misunderstanding about how the interest rate is determined?
To be fair to the corporation, there is room for some miscommunication. Since I qualify only for the 3-yr bond (due to the minimum investment requirement), they might have meant that there is no spread only for the 3-yr bond.
But according to bankrate.com, the LIBOR rate for "the week" of Aug 1 is 5.33% (I don't know how they determined that since BBA LIBOR rates are set daily), and the bond rates quoted by the corporation are valid for Aug 1-7. I cannot find Aug BBA LIBOR rates. But looking at July, the largest variation is
0.0838 pct pts for the month. So it seems unlikely that 5.1625% is the current BBA LIBOR rate.I would ask the bond sales rep. But I have already bothered her with so many nitpicky question that I am becoming a pest -- and honestly, I know I will invest in these bonds anyway. I feel guilty asking more question just for my edification. Moreover, she is inexperienced, so she must relay such questions to a "director".
I just want to know if I have a fundamental error in my understanding of how LIBOR rates are used, or if others agree that the corporation facts or numbers (or bankrate.com's ;-) seem fishy.