--%>

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 : 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 : Tax system problem In the figure shown

    In the figure shown below, line T1 depicts a tax system which is: (1) Regressive. (2) Progressive.  (3) Proportional. (4) Unbiased. (5) Recessive. 2471_7.jpg

  • Q : Full-employment Define the "

    Define the "full-employment" or "natural" rate of unemployment and give its approximate percentage rate as economists currently define it.

  • Q : Demand curves when longer periods are

    Whenever longer periods are considered and hence bigger ranges of adjustments (that is, substitutions) become probable, demand curves tend to become: (i) Flatter, and therefore do supply curves. (ii) Flatter, as supply curves become steeper. (iii) Ste

  • Q : Limitations of using GDP as an index of

    What are the limitations of using GDP as an index of welfare of a country?A) The N.I. figures provide no indication of the population, skill and resource of the country. Thus the levels of welfare stay low.B) A higher N.I. migh

  • Q : Microeconomic and macroeconomic effects

    Predictions which restricting international trade to protect specific industries and “infant” firms would (a) inefficiently decrease aggregate output and employment, (b) raise the market power of the protected firms and their workers, and

  • Q : Problem on diminishing marginal utility

    An illustration of how marginal utility diminishes takes place when: (1) Derek finds it tough to laugh politely when he hears a “new” joke for the fourth time now. (2) Amy Sue chooses she would instead have 150 hogs than 151 on her pig far

  • Q : Role of price in market economies What

    What is the role of price in market economies?

  • Q : Expenditure of money on party effects

    When you pay a straight A student in advance to write up your term paper and that person expends the money on a party and then, hung-over, can’t do a good job and hence you wind up with an F for submitting sloppily written gibberish, you encompass just suffered

  • Q : When Macroeconomic theory least related

    Macroeconomic theory would be least related in analyzing the results of: (w) optional ways of funding deficits in international trade. (x) U.S. federal budget deficits. (y) consumer items purchased through middle-income families. (z) deficit spending through the United Nations.