Prime rate
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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 (verified January 25, 2007), according to data published by the Federal Reserve Bank of Saint Louis.[1] The prime rate for Canadian banks is currently 6.00%.
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In general, the prime rate runs approximately 300 basis points (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.
[edit] Uses
The Prime Rate is used often in calculating mortgages and other variable rate 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 plus a fixed value.
[edit] See also
[edit] External links
- InterestOnlyLoans.com - Current Prime Rate including 15 year history
- Money Cafe Prime Rate including historical data
- Prime Rate Changes History: Dates and Rates - Fed prime rate, not WSJ prime rate
- A complete history of the specific dates on which the Prime Rate changed starting from December of 1947
- Enth: Searchable Prime Rate data
