Definition

1. Noun:
   • Interest on an annual basis deducted in advance on a loan: The "discount rate" is the interest rate charged to a borrower, typically a commercial bank, for a short-term loan. This interest is deducted from the principal amount of the loan at the time the loan is made.
   • The rate of interest set by the Federal Reserve that member banks are charged when they borrow money through the Federal Reserve System: In the context of U.S. central banking, the "discount rate" is the specific interest rate the Federal Reserve charges eligible financial institutions to borrow funds directly from the Federal Reserve's discount window.

Usage Examples

• Noun:
  • The central bank raised the discount rate by 0.25% to curb inflation.
  • When calculating the present value of a future cash flow, you must select an appropriate discount rate.
  • Banks may borrow from the Fed's discount window, but the cost is influenced by the prevailing discount rate.

Advanced Usage

• "Primary credit discount rate": The interest rate applied to short-term loans made by the Federal Reserve to financially sound depository institutions. This is the most common rate referred to as the "discount rate" in U.S. monetary policy.
  • The primary credit discount rate serves as a ceiling for the federal funds rate.
• "Secondary credit discount rate": A higher interest rate charged by the Federal Reserve on loans to institutions that do not qualify for primary credit, often due to financial weaknesses.
  • Banks with significant liquidity problems may have to borrow at the secondary credit discount rate.

Variants and Related Words

• Discount (verb/noun): To reduce a price or value; or the amount by which something is reduced.
  • The store will discount last season's merchandise.
• Discount window (noun): The facility through which the Federal Reserve lends money to commercial banks.
  • The bank accessed the discount window to meet its short-term liquidity needs.

Synonyms

• Bank rate: Often used synonymously, especially outside the United States, to refer to the rate at which a central bank lends to commercial banks.
• Policy rate: A broader term for key interest rates set by a central bank to steer monetary policy, which can include the discount rate.

Related Phrases

• At a discount: Sold for less than its nominal or face value.
  • The bond was trading at a discount because interest rates had risen.
• Discount factor: A decimal number (derived from the discount rate) used to multiply a future cash flow to calculate its present value.
  • A higher discount rate results in a lower discount factor.

Related Idioms

• No idiom directly incorporates "discount rate" as a fixed expression. The term is primarily used in technical, financial, and economic contexts.

Noun

1. interest on an annual basis deducted in advance on a loan
2. the rate of interest set by the Federal Reserve that member banks are charged when they borrow money through the Federal Reserve System