Prime rate

Prime rate

Prime rate, or Prime Lending Rate, is a term applied in many countries to a reference interest rate used by banks. The term originally indicated the rate of interest at which banks lent to favored customers, i.e., those with high credibility, though this is no longer always the case. Some variable interest rates may be expressed as a percentage above or below prime rate.

Use in different banking systems

USA and Canada

Historically, in North American banking, the prime rate was the interest rate although this is no longer the case. The prime rate varies little among banks, and adjustments are generally made by banks at the same time, although this does not happen with great frequency. The prime rate is currently 4.50% in the United States. [According to data published by [http://online.wsj.com/mdc/public/page/2_3020-moneyrate.html The Wall Street Journal Online] and the Federal Reserve Bank. cite web| url=http://www.federalreserve.gov/releases/h15/data/Monthly/H15_PRIME_NA.txt| title=Federal Reserve Statistical Data| publisher=Federal Reserve] Canadian prime rate is currently 4.50%. [According to data published by Bank of Canada. cite web| url=http://www.bankofcanada.ca/en/rates/digest.html| title=Daily Digest- Rates and Statistics- Bank of Canada| publisher=Bank of Canada] .

Overview

In the US, the prime rate runs approximately 300 basis points (or 3 percentage points) above the federal funds rate, the interest rate that banks charge to each other for overnight loans made to fulfill reserve funding requirements. (The Federal funds rate plus a much smaller increment is frequently used for lending to the most creditworthy borrowers today, as is LIBOR, the London Interbank Offered Rate.) The Federal Open Market Committee (FOMC) meets eight times per year wherein they set a target for the federal funds rate. Other rates, including the Prime Rate, derive from this base rate.

The most commonly recognized prime rate index is the Wall Street Journal Prime Rate (WSJ Prime Rate), published in the Wall Street Journal. Unlike other indexed rates, the prime rate does not change on a regular basis; rather, it changes whenever banks need to alter the rates at which borrowers obtain funds. The WSJ defines the prime rate as "The base rate on corporate loans posted by at least 75% of the nation's 30 largest banks."

When 23 out of 30 of the United States' largest banks change their prime rate, the WSJ prints a composite prime rate change.

Uses

The Prime Rate is used often as an index in calculating rate changes to adjustable rate mortgages (ARM) and other variable rate short term loans. It is used in the calculation of some private student loans. Many credit cards and home equity lines of credit with variable interest rates have their rate specified as the prime rate (index) plus a fixed value commonly called the "spread."

References

External links

* [http://www.faircredit.com/prime-rate/ Today's Prime Rate]
* [http://www.moneycafe.com/library/prime.htm Money Cafe Prime Rate including historical data]
* [http://research.stlouisfed.org/fred2/data/PRIME.txt Prime Rate Changes History: Dates and Rates] - Fed prime rate, not WSJ prime rate


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Look at other dictionaries:

  • Prime Rate — Prime|rate, die; , Prime Rate, die; [ pra̮imreɪt ; engl. prime rate, aus: prime = Haupt ; hauptsächlich u. rate = Rate; Zins , Steuersatz] (Wirtsch., Bankw.): (in den USA) Zinssatz, den Großbanken für ihre Kredite berechnen u. der die Funktion… …   Universal-Lexikon

  • prime rate — n: an interest rate formally announced by a bank to be the lowest available at a particular time to its most creditworthy customers – called also prime, prime interest rate; Merriam Webster’s Dictionary of Law. Merriam Webster. 1996 …   Law dictionary

  • prime rate — n. Finance the most favorable interest rate charged by a commercial bank on short term loans to large corporations: also prime interest rate or prime lending rate …   English World dictionary

  • prime rate — prime rates N COUNT A bank s prime rate is the lowest rate of interest which it charges at a particular time and which is offered only to certain customers. At least one bank cut its prime rate today …   English dictionary

  • prime rate — prime′ rate′ n. ban bus the minimum interest rate charged by a commercial bank on short term business loans to large, best rated customers or corporations Also called prime 18) prime′ in′terest rate …   From formal English to slang

  • prime rate — ● prime rate nom masculin (anglais prime rate, meilleur taux) Aux États Unis, taux d intérêt appliqué par une banque pour les crédits à court terme accordés à ses meilleurs clients …   Encyclopédie Universelle

  • prime rate — prime .rate n the lowest rate of interest at which companies can borrow money from a bank →↑base rate …   Dictionary of contemporary English

  • prime rate — prime ,rate noun count the lowest rate available for borrowing money …   Usage of the words and phrases in modern English

  • prime rate — noun : an interest rate formally announced by a bank as the lowest normally available at a particular time to its most creditworthy customers * * * Banking. the minimum interest rate charged by a commercial bank on short term business loans to… …   Useful english dictionary

  • Prime rate — The interest rate at which banks lend to their best ( prime) customers. Much more often than not, a bank s most creditworthy customers borrow at rates below the prime rate. The New York Times Financial Glossary * * * prime rate prime rate ➔ rate1 …   Financial and business terms

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