What’s the difference? My understanding is as below, please correct any mistakes: (1) Federal funds rates is short-term (usually overnight) inter-bank loan rate (not with Fed) (2) Discount rate is the rate at which Fed gives loans to commercial/investment banks (not inter-bank) (3) Discount rate is one of the tools that Fed uses to influence Federal Funds Rates If the above is true, what are the rates that make up the yield curve? such as 3-month rate, 1-year rate, 10-year rate, 30-year rate, etc. THANKS.
Depends on what yield curve you are talking about. LIBOR/Swap curve is the set of rates at which the banks in London borrow and lend at to each other. Treasury yield curve is the spot rates of varying Treasury bills, notes & bonds. Discount rate as you mentioned is the rate at which the Fed lends to banks. It is often not used by the large banks as it is considered a sign of distress. Only recently (mortgage crisis) has this become a somewhat of a source for funds.
Fed Fund Rate is the rate at which one bank loans to other bank for overnight. This is used by each bank as they need to maintain certain amount of cash based on Fed regulations. Discount rate is the rate at which Fed lends loans to banks, giving a public opinion that it is trusting the banks with their credit quality. LIBOR curve is the rate at which banks outside US lend/borrow US $.
Actually most loans that are floating rate use a LIBOR rate as a reference, even in the US.