Question

How could LIBOR rate, Prime rate, etc. be used in reference to discounting?

Answer 1

TFederal Reserve Bank (the Fed) sets both the prime rate (prime) and the discount rate. The prime interest rate—which the Wall Street Journal publishes—plays an important role in determining the lending rates that many banks and other lenders charge for consumer loan products. As a federal interest rate, prime does not vary from state to state. Prime is a short-term rate, but not as short term as the discount rate, which typically is an overnight lending rate.The Fed sets and offers the discount rate to member banks and thrifts that need to borrow money in order to prevent their reserves from dipping below the legally required minimum. When banks within the U.S. banking system loan to each other, they use the discount rate. The discount rate is not usually publicized in a general publication; rather, it's an internal figure.Generally, the prime rate is reserved for banks' most qualified customers—those who pose the least potential for default risk. Prime rates may not be available to individual borrowers as often as to large corporate entities. Because a bank's best customers have little chance of defaulting, the bank can charge them a rate that is lower than the rate charged to a customer who has a higher probability of defaulting on a loan.