If you’re looking at a loan that is indexed to the Prime rate, you may want to identify with specificity who’s Prime rate is being used. Every bank sets their own Prime rate – but for practical purposes I think most big banks offer the same or similar Prime rate. The WSJ publishes a Prime rate that is the rate being offered by the nation’s biggest banks – this is the WSJ Prime and may be the Prime index for alot of loans.
I don’t know of any mandate that Prime must have a +3% margin over the FFR and/or that Prime must move lockstep with the FFR, but that seems to be the case, at least recently. I don’t know about historically. I think you are probably fairly safe operating with the assumption that a +3% margin will remain in place.
For what it’s worth (which ain’t much) I believe we are looking at a low FFR and Prime for the next few years at least. I think there is a 50% probability of the FFR/Prime going down a bit more before going up. There is also an international effort underway to reduce LIBOR down into a tighter position with the FFR.
