What is the prime rate?

The prime rate refers to the interest rate that commercial banks charge their most credit-worthy customers, typically large corporations or well-established businesses with excellent credit scores. This rate is significant because it serves as a benchmark for various other interest rates in the economy, influencing loans for consumers and businesses alike, including credit cards and small business loans.

The prime rate is often tied to the federal funds rate, which is the interest rate at which banks lend to each other overnight, thereby demonstrating how central bank policies can affect lending rates in the broader economy. However, the prime rate specifically denotes the rate offered to a select group of highly reliable borrowers, characterized by minimal risk of default.

Other options refer to different concepts in finance, such as government-set rates or rates used for discounting cash flows, which are separate from the prime lending practices used by banks. Understanding the prime rate is crucial for anyone involved in finance, as it shapes the costs associated with borrowing and is a key indicator of the economic climate.