Brokerage Firm - Question 28

What is the difference between the prime rate and the discount rate? Or are they the same?

No. They’re not the same. The discount rate is the interest rate that the Federal Reserve charges member banks when those banks borrow money using government securities as collateral. The raising or lowering of the discount rate is one of the tools the Federal Reserve has to try to stimulate the economy or to reduce inflationary pressures.

The prime rate is the interest rate that banks charge for loans to their most creditworthy customers. It is considered a key benchmark because other rates are tied into it. For example, the interest rate for many credit cards (home equity loan and automobile leases) is based upon the prime rate plus a set number of percentage points.