Discount Rate Definition. The Discount Rate is the interest rate that an eligible depository institution, mostly banks, is assessed to borrow short-term funds directly from the central bank. In the U.S., the Federal Reserve Bank loans short-term monies directly to member institutions at this rate. The Discount rate is one of two rates set by the Fed, the other being the Fed Funds Rate. This rate is the one used by member institutions to loan their balances at the Fed to other members, generally on an overnight basis. The Fed sets the Discount Rate directly, but banks always have the option of borrowing funds from another source, such that rate setting does not necessarily support monetary policy implementation. The term Discount Rate also has two other meanings related to financial computations. It is used in performing present value calculations and in determining nominal value of Treasury Bills and other financial instruments.
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