Match each benchmark interest rate to its corresponding market definition or borrowing context.
- Federal Funds RateThe rate charged when commercial banks lend uncollateralized excess reserves to each other overnight.
- Discount RateThe interest rate set by the Federal Reserve for short-term loans extended directly to depository institutions.
- Prime RateThe interest rate commercial banks charge their most creditworthy corporate borrowers.
- Broker Call RateThe interest rate commercial banks charge broker-dealers for short-term loans used to cover customer margin accounts.
Answer
Federal Funds Rate matches the rate charged when commercial banks lend uncollateralized excess reserves overnight; Discount Rate matches the rate set by the Fed for loans directly to depository institutions; Prime Rate matches the rate banks charge their most creditworthy corporate borrowers; Broker Call Rate matches the rate banks charge broker-dealers for margin account financing.
Each benchmark rate serves a distinct role in the financial system: the Federal Funds Rate governs interbank overnight reserve lending, the Discount Rate applies to direct central bank borrowing, the Prime Rate applies to top-tier corporate credit, and the Broker Call Rate applies to bank loans extended to broker-dealers for customer margin leverage.
Step-by-Step Solution
Key Concept
Hierarchy and Definitions of Key Benchmark Interest Rates