3% above prime

luko010

Senior Member
Czech
Hi, please what does "3% above prime" mean? 3% above the highest rate of CDs available? I'm not sure..

"To fund the latest incarnation of the gym, we called upon the community to “invest” in us, much like a three-year CD. We offered 3 percent above prime, which is more than you could get then or now, and people I’ve never even seen at the facility came up with the cash to get it started."

Guillebeau, Chris;The $100 Startup

Thank you :)
 
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  • Parla

    Member Emeritus
    English - US
    "Prime" is short for prime rate, which is defined in the financial glossary as "the interest rate that commercial banks charge their most creditworthy borrowers, such as large corporations."

    This group is offering a return three percent above that.


     

    luko010

    Senior Member
    Czech
    I have additional question. In this particular instance, does it mean literally 3% above the rate in which bank borrows most creditworthy clients, or does it mean 3% above the rate in which the most creditworthy clients could get CDs?
     

    Edinburgher

    Senior Member
    German/English bilingual
    Creditworthiness is not relevant to CDs. CDs (short for "Certificates of Deposit", are a very AE thing, the term is not used in BE, where we have "deposits" instead, which we don't need to abbreviate) are where the customer invests or lends, and does not borrow. So "prime rates" does not in this context seem to make sense in terms of creditworthiness. If comparing different 3-year deposit rates, you might get higher interest rates the more you invest.

    So it means 3% more than the best rates you can get on bank deposits.
     

    pob14

    Senior Member
    American English
    Edinburgher, as is explained in more detail at http://www.fedprimerate.com, the prime rate in the US is one number; there isn't one "prime" for CDs, another for car loans, etc., nor do different banks use different ones.

    It is quite common for financial institutions to tie various rates to the prime, as in the OP example.
     

    Edinburgher

    Senior Member
    German/English bilingual
    I see, it's a kind of general-purpose benchmark rate (originally, but no longer, the actual lending rate to "prime" customers) used to determine various rates for both loans and deposits (by adding or subtracting various margins appropriate to the product). However, as your link points out, different banks do use different ones (though now perhaps only in principle), and the WSJ published rate is a kind of "most major banks" average.

    So in terms of the OP's question, the gym business raised funds in the community by offering private investors a return 3% above whatever the Wall Street Journal's published prime rate would have been at the time. Since banks' deposit rates tend to be below loan rates, you'd expect CD rates to be below prime rate. Investors would therefore see a return more than 3% above the best CD rates they could get.
     
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