Massachusetts Real Estate License Practice Test

What is the term for the lowest interest rate charged by commercial banks on short term loans to clients with the highest credit ratings?

1. Prime Rate

2. Discount Rate

3. Base Rate

4. Fixed Rate

The correct answer is: Discount Rate

The correct term for the lowest interest rate charged by commercial banks on short-term loans to clients with the highest credit ratings is known as the Prime Rate. This rate is a benchmark for many other loans and reflects the creditworthiness of a borrower—typically large and financially sound corporations. The Prime Rate is set based on the federal funds rate, which is determined by the Federal Reserve. Clients with the highest credit ratings, often referred to as "prime borrowers," are those that banks consider low-risk, allowing them to qualify for interest rates that are lower than what might be offered to other borrowers. The Discount Rate refers to the interest rate charged by the Federal Reserve to commercial banks for short-term loans, which is not what the question is asking for. The Base Rate typically refers to a benchmark rate used by lenders to set interest rates for loans but does not specifically define the lowest rate for prime borrowers. A Fixed Rate, on the other hand, relates to loans with an interest rate that remains constant throughout the life of the loan, which again does not pertain to the inquiry about the lowest interest rate applicable to the most creditworthy clients.