Gs4 Security: Prime Rate

Wednesday, 19 December 2012

Prime Rate

The prime rate shown in Chart I is the interest rate charged by the majority of the nation’s top 25 domestic commercial banks. One interesting feature is that the prevailing prime rate typically is uniform across all banks—unlike deposit interest rates banks pay, which often vary considerably from bank to bank depending on funding needs and portfolio considerations. While individual banks may change their prime rate at any time depending on market conditions, the prime rate tends to move closely in line with market interest rates. As is illustrated in Chart I, the prime rate (heavy red line) very closely follows the federal funds rate (thin blue line), the interest rate that banks charge each other on overnight interbank loans.This is an interesting question for many borrowers. The prime rate is a “reference or base rate” that banks use to set the price or interest rate on many of their commercial loans and some of their consumer loan products. The prime rate tracks fairly closely with other short-term interest rates, such as the overnight federal funds rate;