Financial Jargon 101

This will be a quick post where I will depart from the traditional subject and focus on good old financial jargon 101. Last week, the Federal Reserve announced that they would raise the discount rate.

Many people confuse the term discount rate, fed funds rate and prime rate. Since these are important, I figured I'd try to explain them.

1. Fed Funds Rate: The rate at which banks (or depository institutions) usually use to lend money to one another. These transactions are usually done on a nightly basis. Go here for the current fed fund rate.

2. Prime Rate: This is the rate at which banks will lend money to their most favored customers. This is determined by surveying certain banks. Go here for the latest WSJ prime rate.

3. Discount rate: This is the rate at which eligible banking institutions can borrow money from the federal government. Go here for the latest discount rate.

These are thee common terms that are mentioned in the financial press on nearly a daily basis. Most other rates are based on these rates. For example, some financing companies fund their operations by using bank financing. Their loan will usually be based on prime rate. So the prime rate affects their cost of funds, which ultimately affects the price they charge their customers.

More on the benefits of purchase order financing on my next post :-)

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