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Key Rate

What is 'Key Rate'

The specific interest rate that determines bank lending rates and the cost of credit for borrowers. The two key interest rates in the United States are the discount rate and the Federal Funds rate.

Explaining 'Key Rate'

The key rates are one of the chief tools used by the Federal Reserve system to implement monetary policy. When the Fed wants to expand the money supply, it will typically lower one or both key rates in order to decrease the cost of borrowing. When the Fed is in a contractionary phase, it will raise the rates to increase the cost of borrowing.


Further Reading


An empirical comparison of published replication research in accounting, economics, finance, management, and marketing
www.sciencedirect.com [PDF]
… is empirical generalization, and replication and extension research is the key to generalization … partially support, or conflict with their predecessors among the accounting, economics, finance, manage- ment, and … statis- tics and CRSP tapes will produce a higher rate of supportive …

Exchange rate economics: where do we stand?Exchange rate economics: where do we stand?
www.sciencedirect.com [PDF]
… is empirical generalization, and replication and extension research is the key to generalization … partially support, or conflict with their predecessors among the accounting, economics, finance, manage- ment, and … statis- tics and CRSP tapes will produce a higher rate of supportive …

International monetary and financial economicsInternational monetary and financial economics
epublications.marquette.edu [PDF]
… is empirical generalization, and replication and extension research is the key to generalization … partially support, or conflict with their predecessors among the accounting, economics, finance, manage- ment, and … statis- tics and CRSP tapes will produce a higher rate of supportive …

LIBOR: Origins, economics, crisis, scandal, and reformLIBOR: Origins, economics, crisis, scandal, and reform
papers.ssrn.com [PDF]
… is empirical generalization, and replication and extension research is the key to generalization … partially support, or conflict with their predecessors among the accounting, economics, finance, manage- ment, and … statis- tics and CRSP tapes will produce a higher rate of supportive …



Q&A About Key Rate


What is a key rate?

A key rate is the specific interest rate that determines bank lending rates and the cost of credit for borrowers.

How do Fed's control money supply with these two key rates?

When they want to expand, they lower one or both of these key rates to decrease the cost of borrowing. When they want to contract, they raise them to increase the cost of borrowing.

How does lowering or raising a key rate affect borrowing costs?

Lowering or raising a key rate affects borrowing costs by decreasing or increasing it respectively.

How does an investor determine if he should borrow money at a certain interest rate?

He must compare his expected return to his risk-free alternative.

What are some factors that affect interest rates?

The borrower's creditworthiness and the term of the loan.

What are two key interest rates in the United States?

The discount rate and Federal Funds Rate.

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