interest rate charged by banks to their most financially sound customers. The prime rate is a reference point for other interest rates-some are lower than the published prime, most are higher. For example, the interest rate on commercial paper is less than the prime interest rate. Most companies have to borrow from financial institutions at a rate in excess of the prime rate. The rate is influenced by the cost of funds to the bank and the rates borrowers will accept.

base rate that banks use in pricing commercial loans to their best and most creditworthy customers. The rate is determined by the Federal Reserve's decision to raise or lower prevailing interest rates for short-term borrowing. Though some banks charge their best customers more and some less than the official prime rate, the rate tends to become standard across the banking industry when a major bank moves its prime up or down. The rate is a key interest rate, since loans to less-creditworthy customers are often tied to the prime rate. For example, a blue chip company may borrow at a prime rate of 5%, but a less-well-established small business may borrow from the same bank at prime plus 2, or 7%. Many consumer loans, such as home equity, automobile, mortgage, and credit card loans, are tied to the prime rate. Although the major bank prime rate is the definitive "best rate" reference point, many banks, particularly those in outlying regions, have a two-tier system, whereby smaller companies of top credit standing may borrow at an even lower rate.

reference note that banks use in pricing short maturity commercial loans to their best, or most creditworthy, customers. Commercial and industrial (C&I) loans are often priced at prime or prime plus a spread. The prime rate is less important today in pricing bank loans to corporate borrowers that have access to the capital markets. Starting in the 1970s, banks began pricing commercial loans at rates below the bank prime to their most creditworthy corporate customers. Many banks, however, still price business loans under $1 million and loans to smaller borrowers at spreads above the prime rate. Alternatives to the bank prime rate are the lender's own cost of funds, and an index rate, such as the London Interbank Offered Rate (LIBOR). Although the prime rate is the definitive best rate for top-quality borrowers, many banks maintain a two-tier pricing system where major corporations and even middle market firms are able to borrow at an even lower rate.

interest rate banks charge to their most creditworthy customers. The rate is determined by the market forces affecting a bank's cost of funds and the rates that borrowers will accept. The prime rate tends to become standard across the banking industry when a major bank moves its prime rate up or down. Banks may offer major customers discounts on the prime rate.

the lowest commercial interest rate charged by banks on short-term loans to their most creditworthy customers. The prime rate is not the same as the long-term mortgage rate, though it may influence long-term rates. Also, it is not the same as the consumer loan rate that is charged on personal property loans and credit cards. Mortgage rates and consumer loan rates are generally higher than the prime rate, but exceptions occur at times.

Example: BankAmerica and Citicorp offer a prime rate of 7%. Chevron/Texaco is a prime customer and at that rate may borrow loans up to 270 days. BankAmerica offers construction loans at 4 points over the prime rate.