Question

What is the discount rate?
A. The discount rate is the interest rate banks charge each other for overnight and short-term lending
B. The discount rate is the interest rate at which the Federal Reserve charges to financial institutions on loans issued at the discount window.
C. The discount rate is a misnomer, as it is the interest rate at which financial institutions charge to the riskiest of borrowers
D. The discount rate is interchangeable with prime rate, the interest rate at which financial institutions charge to its least-risky, or best, customers

Answer 1

B.

The discount rate is the interest rate the Federal Reserve charges depository institutions for loans obtained at the Fed's discount window. (It is distinct from the federal funds rate — the overnight rate banks charge each other — and from the prime rate charged to banks' best customers.)