Final answer:
The statement about the prime interest rate being charged to the most creditworthy customers and used as a basis for higher-risk loans is true. Banks determine the interest rates by considering creditworthiness and risk, and they must manage risks associated with the asset-liability time mismatch.
Step-by-step explanation:
The statement is true. The interest rate that commercial banks typically charge their most creditworthy commercial customers for short-term loans is known as the prime rate. This rate is often used as a benchmark for setting interest rates on higher-risk loans, which is why other borrowers are typically charged a higher interest rate.
When banks lend to businesses and individuals, they consider factors such as credit ratings, established by agencies like Standard and Poor's and Moody's, as well as savings and other investments. These considerations help banks to determine the likelihood of being repaid.
The prime rate serves as the base upon which the risk premium is added to determine the final interest rate for each borrower.
Banks also face risks from an asset-liability time mismatch, where they have to manage the difference in the terms of their assets and liabilities, like dealing with loan repayments spread over years versus deposits that can be withdrawn quickly.
This could lead to a situation where banks might pay more interest to depositors than they receive from borrowers if interest rates rise, resulting in financial difficulties for the bank.