Question

In: Economics

1. The overnight lending rate is a. the interest rate the banks charge one another on...

1. The overnight lending rate is

a. the interest rate the banks charge one another on overnight loans, whereas the prime interest rate is the interest rate banks change on loans to their most creditworthy customers.

b. the interest rate the banks charge on loans to their most creditworthy customers, whereas the prime interest rate is the interest rate banks charge their largest and most preferred business customers.

c. the interest rate the banks charge on loans to their most creditworthy customers, whereas the prime interest rate is the interest rate banks charge one another on overnight loans.

d. the interest rate the Bank of Canada charges banks for a loan, whereas the prime interest rate is the interest rate banks charge their preferred customers.

2. The overnight lending rate is

a. lower than the prime interest rate because federal funds are loaned overnight.

b. higher than the prime interest rate because there are many alternative uses for the funds and opportunity costs must be accounted for.

c. nearly the same as the prime interest rate because they are both short term loans.

d. not comparable to the prime interest rate since the lenders are different.

3. Changes in the overnight lending rate and the prime interest rate closely track one another because

a. there are fewer prime rate reserves available for lending.

b. both rates are related to the relative scarcity or availability of reserves.

c. all interest rates will be equal whether the customers are banks, businesses, or households.

d. the Bank of Canada arranges this to be the case.

Expert Solution

The overnight rate refers to the interest rate that banks charge each other for overnight lending.

The prime rate (prime) is the interest rate that commercial banks charge their most creditworthy customers, generally large corporations

so

1. The overnight lending rate is

a. the interest rate the banks charge one another on overnight loans, whereas the prime interest rate is the interest rate banks change on loans to their most creditworthy customers.

..

2. The overnight lending rate is

a. lower than the prime interest rate because federal funds are loaned overnight.

Overnight lending rate is applicable for very short term loan to other banks, while prime rate is given to trustworthy business so overnight lending rate is lower than the prime rate.

..

3. Changes in the overnight lending rate and the prime interest rate closely track one another because

a. there are fewer prime rate reserves available for lending.

When a bank gives loans to other bank at an overnight lending rate there is few prime rate reserves available for lending as as result changes in the overnight lending rate and the prime interest rate closely track one another

Rahul Sunny answered 8 months ago

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