UK Accounting Glossary
The interest rates that banks charge to their most creditworthy customers. The prime rate is an important reference number, because loans to all other customers are connected to it on a percentage basis.
In the US, the prime rate was historically defined as the interest rate banks charge their best customers for loans.
In fact, some borrowers occasionally receive credit for below the prime rate. The prime rate is seldom changed, though most banks tend to change it at the same time. The best-known prime rate index is the Wall Street Journal prime rate. The Wall Street Journal announces a change in “the” prime rate whenever at least 23 of the 30 largest banks make a change to their stated prime rate. In practice, the prime rate tends to work out to three percentage points above the nominal Federal Funds Rate set by the Board of Governors of the Federal Reserve. The prime rate has been eclipsed in importance by LIBOR for setting interest rates on most loans for bank customers.
Due to Gerald’s great credit rating, the bank offered him a mortgage at the prime rate.
One way for governments to control the economy is by adjusting the prime rate.
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This glossary post was last updated: 6th February 2020.