Prime rate is a term applied in many countries to a reference interest rate used by banks. The term originally indicated the rate at which banks lent to their most favoured customers, though this is no longer always the case. Some variable interest rates may be expressed as a percentage above or below prime rate.
Use in different banking systems
USA and Canada
Historically, in North American banking, the prime rate was the interest rate charged by lenders to borrowers whom they considered most creditworthy, although this is no longer the case. The prime rate varies little among banks, and adjustments are generally made by banks at the same time, although this does not happen with great frequency. The prime rate is currently 8.25% in the United States (as of June 30, 2006), according to data published by the Federal Reserve Bank. Canadian prime rate is currently 6.25% by Bank of Canada (as of Jul 11, 2007). The prime rate is one of the ways the central bank, such as the Federal Reserve, controls the spending habits of consumers.
Overview
In general, the prime rate runs approximately 300 basis points (or 3 percent) above the federal funds rate, the interest rate that banks charge to each other for overnight loans made to fulfill reserve funding requirements. (The Federal funds rate plus a much smaller increment is frequently used for lending to the most creditworthy borrowers today, as is LIBOR, the London Interbank Offered Rate.) The Federal Open Market Committee (FOMC) meets eight times per year wherein they set a target for 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.[citation needed]
When 23 out of 30 of the United States' largest banks change their prime rate, the WSJ prints a composite prime rate change.
Uses
The Prime Rate is used often as a index in calculating rate changes to adjustable rate mortgages(ARM) and other variable rate short term 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(index) plus a fixed value commonly called the spread
Use in different banking systems
USA and Canada
Historically, in North American banking, the prime rate was the interest rate charged by lenders to borrowers whom they considered most creditworthy, although this is no longer the case. The prime rate varies little among banks, and adjustments are generally made by banks at the same time, although this does not happen with great frequency. The prime rate is currently 8.25% in the United States (as of June 30, 2006), according to data published by the Federal Reserve Bank. Canadian prime rate is currently 6.25% by Bank of Canada (as of Jul 11, 2007). The prime rate is one of the ways the central bank, such as the Federal Reserve, controls the spending habits of consumers.
Overview
In general, the prime rate runs approximately 300 basis points (or 3 percent) above the federal funds rate, the interest rate that banks charge to each other for overnight loans made to fulfill reserve funding requirements. (The Federal funds rate plus a much smaller increment is frequently used for lending to the most creditworthy borrowers today, as is LIBOR, the London Interbank Offered Rate.) The Federal Open Market Committee (FOMC) meets eight times per year wherein they set a target for 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.[citation needed]
When 23 out of 30 of the United States' largest banks change their prime rate, the WSJ prints a composite prime rate change.
Uses
The Prime Rate is used often as a index in calculating rate changes to adjustable rate mortgages(ARM) and other variable rate short term 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(index) plus a fixed value commonly called the spread
