Final answer:
The prime rate is what banks charge their best corporate borrowers for unsecured loans and can vary widely, influenced by factors such as credit rating and the type of borrowing institution. The discount rate, set by the Federal Reserve, is charged to banks and follows specific programs based on lending conditions.
Step-by-step explanation:
The interest rate that commercial banks charge their most creditworthy corporate borrowers for unsecured loans is commonly referred to as the prime rate. This is the rate that banks, especially national ones, offer to their best customers as a baseline and often they go much higher for others who are deemed a higher risk.
For example, credit unions may offer rates between 6% and 10%, while consumers might receive credit card offers with interest rates ranging from 17% to 20%. The discount rate is another related concept, which is the interest rate charged to commercial banks by the Federal Reserve for loans they receive through the discount window. There are three programs: primary credit, secondary credit, and seasonal credit, with primary credit being the main program.
The Federal Reserve sets the rates for these programs, with primary credit typically set above short-term market rates and each Reserve Bank's board of directors establishing the rates, subject to the Board of Governors' review.
In essence, a bank's rate might fluctuate for individual borrowers based on their credit rating, determined by past borrowing history and reliability. The rate charged by banks to less creditworthy customers will typically be higher to reflect the increased risk.