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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 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 the riskiest of borrowers.
D. The discount rate is interchangeable with the prime rate, the interest rate at which financial institutions charge their least-risky, or best, customers.

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Final answer:

The discount rate is the interest rate charged to commercial banks on loans from the Federal Reserve's discount window.


Explanation:

The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured.


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