Monday, June 8, 2009

determining the prime rate

determining the prime rate is part of the decision-making process involved in managing a bank is balance sheet. three major types of market rates are considered in making this particular decision; (1)rates on nonloan bank assets, e.g., yields on U.S. government securities, (2) rates on bank-acquired liabilities,i.e., the rate banks pay when they "buy" deposits in the form of certificate of deposit,(3) rate on corporate dept claims issued in place of bank borrowing, e.g., Yields in commercial paper market. the effect of a change in the demand for nonprime loans, as well as prime loans, must also be considered when the prime rate is changed, since a change in this key bank lending rate often leads to changes in other bank lending rates. Even before the floating prime rate was introduced, when the prime rates was set administratively, it tended to be related to money market rates, though not quite so closely as after the floating principle was established.

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