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Discussion of federal adjustments of primer interest rate.

(1) You are having a meeting with the employees of Financial Outsourcing, Inc. During the meeting, you were asked several questions. Give your opinion to the questions.

- Why do you think the Federal government adjusts (raises or lowers) the prime interest rate?
- What do you think are some of the effects of the adjustments?
- Why do you think bankers, investors, lenders, and consumers closely follow the movement of the prime interest rate?
- What are some of the implications of a change in the prime rate?
- ''Annuities are not a wise choice for certain investors''. Do you agree with that statement? Write a brief paragraph explaining why or why not .

(2) During the meeting, several employees remark that some of the clients have asked advice about offering a trade discount for purchases in wholesale quantities.

- What do you tell them?
- Should they offer trade discounts?
- Is your response the same for all your clients? Explain your rationale.

Solution Preview

First of all, the Federal government doesn't really adjust the prime rate. It adjusts the fed funds rate, which have far-reaching effects by influencing the borrowing cost of banks in the overnight lending market, and subsequently the returns offered on bank deposit products such as certificates of deposit, savings accounts, and money market accounts. That in turn influences the prime rate (those two are tied together). Some effects of the adjustment are: increased profit for banks, possibly lower borrowing ability of different organizations (like banks) or private customers. Hence bankers, lenders, investors, etc. are following closely on what the rate is and ...