Definition of discount rate

The interest rate charged by a central bank to commercial banks when lending short-term funds (by discounting government paper or using government paper as collateral). In the US, the discount rate, which acts as a reference rate for commercial banks' own lending rates, is one of the two key rates manipulated by the Federal Reserve to control money supply (the other being the Federal funds rate). The discount rate is also the interest rate at which commercial banks discount bills of exchange. The term also refers to the interest rate used to calculate discounted cashflow.

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