Prime rate standard falls by wayside

Dear Dr. Don,
The interest rate on a loan depends in part on its maturity. For example, this week's one-month London interbank offered rate, or LIBOR, is 3.13 percent, but the one-year LIBOR is 2.71 percent. Bankrate's definition of The Wall Street Journal prime rate does not mention maturity. What is this time period?
-- Hector Howto

Dear Hector,
You raise a good point. The easy answer is that Bankrate is reporting The Wall Street Journal number and that number doesn't include a loan term. The WSJ prime rate is the base lending rate posted by 75 percent of the nation's largest banks.

Historically, the prime rate was the base lending rate that banks would lend their best, or prime, customers for a short-term loan. That standard has fallen by the wayside, as explained in an earlier Dr. Don column, " How the prime rate is figured." When prime customers can borrow at a discount to the prime rate, the number has lost most of its meaning.

Observing the changes in the prime rate in recent history show it as 3 percent over the targeted federal funds rate. The targeted federal funds rate is an overnight rate. The targeted federal funds rate is changed by Federal Open Market Committee, or FOMC, action.

I like to think of LIBOR as the British equivalent of the federal funds rate. LIBOR, as you point out, is quoted for different loan terms. A LIBOR rate exists from one day to five years. Bankrate reports the one-, three-, six- and 12-month LIBOR rates on its " LIBOR, other interest rate indexes" page.


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