Question

When one commercial bank borrows from another commercial bank, it pays the __________ rate.

Answer 1

When one commercial bank borrows from another commercial bank, it pays the discount rate.

The one place where a bank can get reserves is by borrowing from a commercial bank. As whenever a person or a business firm or an organization borrows, they should pay interest and a bank that borrows from a commercial firm must pay interest to them too. The interest that the commercial bank charges to banks that borrow from them is called the discount rate.

The term discount rate is used when looking at a certain amount of money to be received in the future years and calculating the present value now. The word “discount” means the amount to be deducted. A discount rate is a typical rate that is deducted from a future quantity of money to provide its present value to money seekers.

The cash flows of investments or business ventures when at the time of discount, it is important to note whether the discount rates used can be varied depending on particular different elements. So, discount rates are paid to compensate the borrower bank to the lender bank during transactions.

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