--%>

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 : Closed economy Hello. I need help with

    Hello. I need help with my assignment, I was sick and lost alot of time.My submission deadline is tomorrow i need your help i have attached the questions Thanks in advance

  • Q : Nominal GNP problem The value of

    The value of nominal GNP of an economy was Rs. 2,500 crores in a specific year. The value of GNP of that country throughout the same year, computed at the prices of some base year was Rs.3000 crores. Evaluate the value of GNP deflator of the year in terms of percentag

  • Q : Physical quality of life index DISCUSS

    DISCUSS the experience of high GNP countries and low GNP with regard to PQLI.

  • Q : Effect of flood on demand Mold which

    Mold which destroyed the hamburger crop following a flood would be most probable to slash the demands for: (1) Fried chicken with mashed potatoes and gravy. (2) Soda pop and water. (3) Cucumbers, carrots, and egg plant. (4) Mustard and ketchup. (5) Tofu and sushi.

  • Q : Fiscal and Monetary policies How can

    How can governments seek to control their national economies through fiscal and monetary policies?

  • Q : Normative macroeconomic policy

    Widely accepted normative macroeconomic policy objectives include: (w) full employment and economic development. (x) allocative, productive, and distributive efficiency. (y) maximum freedom and economic profits. (z) job security and equality within th

  • Q : Consumer Surplus and Producer Surplus

    In a graph of competitive market in equilibrium, the net surpluses producers and consumers enjoy generally equivalents the area among the: (i) Demand and supply curve however to the left of point of the market equilibrium. (ii) Horizontal axis and a 45°line origin

  • Q : Physical quality of life index DISCUSS

    DISCUSS the experience of high GNP countries and low GNP with regard to PQLI.

  • Q : Merger and acquisition of firms

    Question: Suppose firm 1 and firm 2 merge. Call the new firm A. It has output xA and profit πA. Suppose there is Cournot competition after the merger. For now, we assume that the marginal cost of Firm A, the mer

  • Q : Interest receipt Why is interest

    Why is interest received classified as revenue receipt? Answer: Interest received is a revenue receipt since it does not build any liability nor it leads to the red