Question

Please explain the question below in in 2-3 paragraphs

What is the prime rate and how is it used by financial institutions?

Answer 1

The prime rate is the interest rate that commercial banks charge on the loans for their most creditworthy customers. Because a bank's creditworthy customers have little chance for making default of the loan and the bank charges them a lower rate than the rate they charge for a customer who are likely to default on a loan. The prime rate is the starting point for other interest rates of the banks. Prime rate plus a certain percentage forms the normal interest rate for the loans.

There is no single prime rate since each bank has its own interest rate. Usually the prime rate is the average of the prime rates of the largest banks.