Write the difference between discount rate and interest rate.

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.