What term is used for the interest rate the Federal Reserve charges banks?

What term is used for the interest rate the Federal Reserve charges banks?

• A. Prime Rate
• B. Discount Rate
• C. Mortgage Rate
• D. Fed Funds Rate

Answer: (B)

The discount rate is the rate the Federal Reserve charges banks to borrow directly from the central bank’s discount window. It’s a liquidity tool used when banks need short-term funds, and it’s typically higher than the target federal funds rate to discourage routine use. The other rates don’t fit this scenario: the prime rate is what banks charge their best customers for unsecured loans, the mortgage rate is the interest on home loans, and the Fed Funds Rate is the market rate for overnight loans between banks, not a rate the Fed charges banks directly.

The discount rate is the rate the Federal Reserve charges banks to borrow directly from the central bank’s discount window. It’s a liquidity tool used when banks need short-term funds, and it’s typically higher than the target federal funds rate to discourage routine use. The other rates don’t fit this scenario: the prime rate is what banks charge their best customers for unsecured loans, the mortgage rate is the interest on home loans, and the Fed Funds Rate is the market rate for overnight loans between banks, not a rate the Fed charges banks directly.