--%>

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 : McConnell Brue Flynn 19e What

    What relationship does the MPC bear to the size of the multiplier

  • Q : Macroeconomic perspective for Economic

    A family’s newly constructed home can produce the service of shelter across several years, therefore from a macroeconomic perspective, this is most reasonably classified as: (i) economic capital. (ii) social infrastructure. (iii) market capitalization. (iv) a fi

  • Q : Problem on full employment Does full

    Does full employment take place if AD = AS or S = I?

  • Q : Equal Marginal advantage law Assume

    Assume that you receive $18 worth of “jollies” (that is, satisfaction, utility or pleasure) from the very first hole of golf played on a particular day, and that your extra jollies from succeeding holes drops $1 for each and every hole played. You should p

  • 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 : Decisions at the Margin The least

    The least apparent illustration of how decisions are generally ‘at the margin’ would be: (i) Purchasing an additional novel after learning that all paper-backs at Borders are on sale for 25 percent off. (ii) Tossing a 6-year old cousin to the deep end of t

  • Q : Relevance of matter-SWOT analysis

    Relevance of matter: Relevance of matter is very much important while choosing any goals. Are the goals relevant to the vision of the company? A goal of having maximum number of customers seems fantabulous, however at the same time bank needs to make

  • Q : Custodian of nations foreign exchange

    Name the institution that acts as a custodian of nation’s foreign exchange reserves? Answer: The Central Bank is an institution that acts as custodian of natio

  • Q : Surplus of AD over AS-Inflationary gap

    Does a surplus of AD over AS always entail a condition of inflationary gap? Answer: No. Inflationary gap takes place only if AD > AS equivalent to full employmen

  • Q : Positional Goods problem Can someone

    Can someone help me in finding out the right answer from the given options. In accord with the theories of Thorstein Veblen, the positional goods from which the owner or user of the good derives the jollies mainly since of the power, class and status signaled by the p