Prime rate

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In North American banking, the prime rate is the interest rate charged by lenders to borrowers who they consider most creditworthy. It varies little among banks, and adjustments are generally made by banks at the same time, although this does not happen with great frequency.

1 Source
2 Uses
3 See also
4 External links

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Source

In general, the prime rate runs approximately 3 % above the Federal Funds Rate, the interest rate that banks charge to each other. The Federal Funds Rate is likewise determined by the Discount Rate, the rate that is actually set by the Federal Open Market Committee (FOMC) in its periodic meetings. The Fed thus 'targets' 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." It has been speculated though that this is no longer the real definition, (and that the prime rate is simply the fed funds target rate + 3) because most corporate loans are indexed to LIBOR.

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

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Uses

The Prime Rate is used often in calculating mortgages and other variable rate loans. It is used in the calculation of some private student loans. Many credit cards with variable interest rates have their rate specified as the prime rate plus a fixed value.

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