Ace the AFP Exam 2025 – Boost Your Financial Wizardry!

In the context of financial borrowing, the term "base rate" refers to the standard interest rate used by lenders to set rates for various types of loans. The correct answer highlights that the commercial bond rate does not fit into this category.

The London Interbank Offered Rate (LIBOR), the federal funds rate, and the prime rate are all considered base rates. LIBOR is a benchmark rate that some of the world's leading banks charge each other for short-term loans, widely used in various financial products. The federal funds rate is the interest rate at which banks lend reserves to each other overnight and serves as a critical indicator of monetary policy. The prime rate is the interest rate that commercial banks charge their most creditworthy customers, often used as a reference rate for consumer loans and mortgages.

In contrast, the commercial bond rate pertains to the interest rate associated with corporate bonds and reflects the yield required to attract investors to lend to corporations, rather than a rate used broadly for setting loan interest levels across various financial products. This distinction makes it clear why the commercial bond rate is not categorized as a base rate in financial borrowing.