Fixed Income Securities (Bonds): Interest Rates

An interest rate is the amount a lender charges for the use of assets expressed as a percentage of the principal. The money to be repaid is usually more than the borrowed amount since lenders require compensation for the loss of use of the money during the loan period. The difference between the total repayment sum and the original loan is the interest charged. The interest charged is applied to the principal amount.

The prime rate is an interest rate determined by individual banks. It is often used as a reference rate (also called the base rate) for many types of loans, including loans to small businesses and credit card loans. Although the Federal Reserve has no direct role in setting the prime rate, many banks choose to set their prime rates based partly on the target level of the federal funds rate--the rate that banks charge each other for short-term loans--established by the Federal Open Market Committee. The Federal Reserve publishes a daily list of selected interest rates.

Commercial interest rates are rates used for commercial lending products, such as mortgages, CDs, and loans.