ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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.

Detailed explanation-2: -The federal funds rate, or fed funds rate, is set by the Federal Open Market Committee (FOMC) of the Federal Reserve. It can be defined as the interest rate charged to various lending institutions such as banks on unsecured loans that are borrowed overnight.

Detailed explanation-3: -The fed funds rate is the interest rate that depository institutions-banks, savings and loans, and credit unions-charge each other for overnight loans. The discount rate is the interest rate that Federal Reserve Banks charge when they make collateralized loans-usually overnight-to depository institutions.

Detailed explanation-4: -A discount rate is an interest rate. The term “interest rate” is used when referring to a present value of money and its future growth. The term “discount rate” is used when looking at an amount of money to be received in the future and calculating its present value.

Detailed explanation-5: -The discount rate is the interest rate used to calculate the present value of future cash flows from a project or investment. Many companies calculate their WACC and use it as their discount rate when budgeting for a new project.