The discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve's discount window.
The discount rate also refers to the interest rate used in discounted cash flow analysis to determine the present value of future cash flows.
BREAKING DOWN 'Discount Rate'
The Fed's discount rate is an administered rate set by the boards of the Federal Reserve Banks and approved by the Board of Governors; it is not a market rate. The Fed's 12 regional branches offer very short-term – generally overnight – loans to banks that are experiencing funding shortfalls in order to prevent liquidity problems or, in the worst-case scenario, bank failures. This lending facility is known as the deposit window; it is different from the interbank borrowing that institutions with deposits at the Fed do among themselves, which is governed by the federal funds rate.
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