Question

1.) The Discount Rate is equal to 1% and the Fed Funds Rate is equal to...

1.) The Discount Rate is equal to 1% and the Fed Funds Rate is equal to .5% What does the Prime Rate equal?

2.) The Discount Rate is equal to 1% and the Fed Funds Rate is equal to .5% At what rate would banks be able to borrow from the Fed?

3.) The Discount Rate is equal to 1% and the Fed Funds Rate is equal to .5%At what rate would banks be able to borrow from each other's reserve balances?

4.) The prime rate is equal to 5%. In a normal market environment, what is the Fed Funds Rate equal to?

5.) The Discount Rate is equal to 1% and the Fed Funds Rate is equal to .5% The three month (or 13 week) T-Bill is paying .25%What is the risk-free rate equal to?

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Answer #1

Prime rate is the rate at which commercial banks lend to their customers. Prime rate is usually 3% higher than the Fed funds rate = 0.50+3 = 3.50%

The banks would be able to borrow at 1% that is the discount rate from FED

The banks can borrow from each others reserve balances at Fed Funds Rate which is 0.50%

If prime rate is 5% than Fed Funds Rate would be equal to 5%-3% = 2%

Risk free rate is the return an investor would expect by investing in risk free assets. The current T-Bill is paying 0.25%. Hence the risk free interest rate is 0.25%

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