Discount Rate
🏦 Banking
Quick Definition
The discount rate is the interest rate that central banks charge commercial banks for short-term loans, influencing monetary policy and economic conditions.
Formula
Discount Rate = (Future Cash Flow / (1 + Discount Rate)^n)Examples
- 1A central bank may raise the discount rate to curb inflation by making borrowing more expensive for commercial banks.
- 2During a financial crisis, a central bank might lower the discount rate to encourage more borrowing and increase liquidity in the economy.
- 3A commercial bank might borrow from the central bank at the discount rate to meet its reserve requirements or to manage unexpected shortfalls in funds.
Tags
central-bankinginterest-ratemonetary-policyeconomic-policyinflation-control
Related Terms
Other terms you might find helpful
Federal Funds Rate
The Federal Funds Rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight.
Inflation
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power.
Monetary Policy
Monetary policy refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals.
Quick Info
Category:Banking
Difficulty:intermediate
Last Updated:6/18/2025