What are Discount Rates with regards to Investments?

Answer:
The discount rate actually represents three

different rates based on the different discount window programs offered by the Federal Reserve Bank’s lending facility to commercial banks and depository institutions. The different programs are primary credit, secondary credit, and seasonal credit with each program having its own discount rate. The discount rate is the interest rate for the program that the Federal Reserve Bank charges to the banking institutions for each of these different programs.

The primary credit rate has a discount rate that is set above the usual short-term market rates. Since the primary credit rate is the main discount window program offered by the Federal Reserve Bank, the term “discount rate” as commonly used generally refers to the primary credit rate.

The secondary credit rate is above the primary credit rate. The seasonal credit rate is actually an average of various market rates.

The Federal Reserve Bank’s board of directors is responsible for coming up with the discount rates which are subject to review by, and determination of, the Federal Reserve System’s board of governors.


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