Match each benchmark interest rate to its correct definition or market description in the U.S. financial system.
- Federal Funds RateThe interest rate that commercial banks charge each other for overnight uncollateralized loans of reserve balances.
- Discount RateThe interest rate charged directly by the Federal Reserve to eligible depository institutions for short-term loans.
- Prime RateThe interest rate commercial banks charge their most creditworthy corporate borrowers.
- Broker Call RateThe interest rate banks charge broker-dealers for money borrowed to finance margin loan accounts.
Answer
Federal Funds Rate matches the rate commercial banks charge each other for overnight reserve loans; Discount Rate matches the rate charged by the Federal Reserve for direct loans; Prime Rate matches the rate commercial banks charge their most creditworthy corporate customers; Broker Call Rate matches the rate banks charge broker-dealers to finance margin accounts.
Each benchmark rate serves a specific role within the capital markets interest rate structure: Federal Funds Rate measures interbank overnight reserve loans, Discount Rate is the Fed's direct lending rate to banks, Prime Rate is the base rate for top corporate customers, and Broker Call Rate is the rate extended to broker-dealers for customer margin debt financing.
Step-by-Step Solution
Key Concept
Benchmark Interest Rate Hierarchy and Definitions