Which rate is the rate of interest that top-quality banks charge each other for loans?

• A. LIBOR
• B. Prime rate
• C. Discount rate
• D. Fed funds rate

Answer: (A)

The rate at which top-tier banks borrow from one another in the wholesale market is LIBOR. It represents the interest at which major banks claim they can lend unsecured funds to each other for short periods, making it a global reference point for pricing a wide range of loans and derivatives. The other rates don’t capture the interbank borrowing among big banks: the prime rate is the rate banks charge their best corporate customers, the discount rate is the rate the Fed charges banks for direct borrowing from the central bank, and the Fed funds rate is the central bank’s target for overnight lending among banks, not the broad interbank benchmark used for private-sector lending.