Study for the Series 65 Exam: Investment Adviser Representative

by Bob Eder

Prime Rate Vs. Discount Rate The discount rate is different from the prime rate. The prime rate is what banks charge their creditworthy customers. The discount rate is what the Fed charges its member banks for very short-term loans. Both should be distinguished from the “call money rate” or “brokers loan rate,” the rate banks charge brokerage firms for loans collateralized by securities. The discount rate is the least volatile of all short-term rates, changing only now and then. Fed Funds Rate The most volatile is the “federal funds rate,” charged by banks for overnight borrowing. Banks are constantly borrowing from and lending to other banks. Banks charge or pay the fed funds rate for these overnight loans. The Fed exercises only indirect control over this rate. The Fed announces its preferred level, and then most banks willingly go along with the Fed's suggestion.