Write the difference between discount rate and interest rate.

Banking & FinanceManagementCompanies/Organisations

The major differences between discount rate and interest rate are as follows −

Discount Rate

  • Federal reserve banks charges to depository institution/commercial banks on its overnight loans.

  • Central banks decide the rate.

  • It is not determined by market rate of interest.

  • It determines present value of future cash flows.

  • It focuses on investors view.

  • The demand and supply has no effect on discount rate.

Interest Rate

  • It is an amount charged by lender to a borrower for use of assets.

  • Commercial banks decide the rate.

  • It depends on market rate of interest, creditworthiness etc.

  • It can’t determine present value.

  • It focuses on lender’s view.

  • The demand and supply has effect on interest rate.

raja
Published on 27-Jul-2020 11:49:29
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