Match each benchmark interest rate with the description that accurately defines its borrowing mechanism or market participant relationship.
- Federal Funds RateThe interest rate depository institutions charge one another for uncollateralized overnight loans of excess reserves.
- Discount RateThe administrative interest rate set directly by the Federal Reserve for short-term loans extended to member banks via the discount window.
- Prime RateThe base commercial interest rate charged by banks to their most creditworthy corporate borrowers.
- Broker Call RateThe interest rate banks charge broker-dealers for short-term loans used to cover client margin accounts.
Answer
Federal Funds Rate matches the rate charged between banks for uncollateralized overnight loans of reserves; Discount Rate matches the rate set directly by the Federal Reserve for loans via the discount window; Prime Rate matches the rate commercial banks charge their most creditworthy corporate customers; Broker Call Rate matches the rate charged by banks to broker-dealers for loans financing margin accounts.
Each key benchmark rate reflects a distinct market relationship: Federal Funds represents interbank reserve lending, Discount Rate represents direct central bank lending to banks, Prime Rate represents commercial bank lending to prime corporate borrowers, and Broker Call Rate represents bank lending to securities broker-dealers.
Step-by-Step Solution
Key Concept
Benchmark Interest Rate Roles and Institutional Mechanisms
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