--%>

Discount rate-Prime rate and the Subprime rates of interest

What is the difference among the discount rate, prime rate and the subprime rates of interest? Which interest rate in particular build the 2008 recession? Explain how that happened.

E

Expert

Verified

Discount rate refers to that interest rate which would be charged by the Federal bank to the depository institutions for borrowing its reserves. Prime rate refers to that which banks charge the creditworthy customers and is just 3 percentage points over fed funds rate. When the creditworthiness lowers, the interest rate increases. Subprime rates refer to those charged on subprime loans offered to the less creditworthy customers. Both prime and subprime rates are charged on all loans offered by banks and differs based on the creditworthiness of the customer.

Subprime interest rates
created the 2008 recession. Sales of single family homes peaked in 2005, with the increase in population as well as the need for home ownership, which resulted in a housing boom leading to rocketing home prices. As the prices surged upwards drastically, homes became more expensive and the subprime interest rates were also high. Subprime loans with adjustable rates, extremely low or no down payments, etc were offered and borrowed with the hope that they can be paid off when the prices escalate more. However, owing to fraudulent transactions, subprime mortgage defaults emerged, which led to the fall in home sales in 2006 which eventually led to the end of price escalation. With the prices much lower than the purchase price, more and more mortgage loans were defaulted, which led to the failure and shutdown of a few well-known banks. Thus this created the 2008 recession

   Related Questions in Macroeconomics

  • Q : Equilibrium The equilibrium interest

    The equilibrium interest rate is determined

  • Q : Purchasing and consumption of

    The usual household maximizes the utility by spending all its money to purchase and consume a combination of goods which yields: (1) Fundamental physiological requirements and customary wants. (2) Maximum status and the social prestige. (3) Complete satisfaction of al

  • Q : Agency function of Commercial Bank Name

    Name the six agency function of Commercial Bank. Answer: A) Transfer of funds B) Collection of funds C) Purchase and sale of securities. D) Collection of dividends E) Payment of bills &

  • Q : Self consumption-Value of output

    Illustrate whether output generated for self consumption is comprised or not comprised in the value of output? Answer: The output generated for self consumption is

  • Q : Type of market when people cannot buy

    Whenever people can’t purchase all of a good they are willing and capable to pay for at present market price, there is surely a market: (1) Price ceiling. (2) Price floor. (3) Shortage. (4) Anomaly.  (5) Surplus. Please

  • Q : Principles of macroeconomics Explain

    Explain the concept of “economies of scale” and “increasing returns”.

  • Q : State the Income Effect Can someone

    Can someone please help me in finding out the accurate answer from the following question. The Income effects are: (i) Adjustments people make since the purchasing power of the given income is modified whenever prices change. (ii) Adjustments people make since the pur

  • Q : Why value of multiplier is low In poor

    In poor countries people spend a big percentage of their income so that APC and MPC are high. Yet, the value of multiplier is low. Explain why?

  • Q : Difference on consumer willing to pay

    I have a problem in economics on Consumer Surplus-Difference consumer willing to pay and what actually pay. Please help me in the following question. The consumer surplus signifies to the difference among the: (i) Satisfaction of wealthy people and th

  • Q : Fundamental supply and demand in foreign

    Question: Changes in currency supply and demand can be traced back to changes in fundamental supply and demand in foreign and domestic i._____________________ markets and foreign and domestic ii.___________________