Why are interest rates calibrated in 1/8 incriments?

Would it make more sense to reduce it to tenths? IMO it would because it would lead to finer refinements and people can wrap there minds around tenths easier than eighths.

Which interest rates? Most consumer and business rates, both for loans and for savings, are in hundredths. So are treasury securities. Actually, some of those are in thousandths. They haven’t been in eighths for decades, AFAIK.

Are you thinking of something in particular?

I thought, but am evidently wrong, that the Prime Rate was in 1/8 incriments.

Just guessing, but I suspect it has something to do with the practice starting before digital calculators. People were used to calculating fractions.

That makes sense! Surprised they’ve stuck with 1/8 because as said above, other rates are in 1000ths now.

Pieces of Eight?

Isn’t that why stocks in the US were traditionally quoted to the eighth of a dollar?

It was so they could get the price that was closest in size to the bird on their shoulder.

You know, best-fit Polly-nomials.

Ah, the prime rate. The OP talked about people and the two don’t go together.

The Prime Rate is calculated off the federal funds rate, a rate that banks use in transactions with other banks. The Prime Rate is normally 3 percentage points higher. These are nominal rates, given to the best clients. Smaller customers don’t get these preferred rates. There is a effective rate that is calculated off of real-world daily transactions.

The federal funds rate is a crude instrument rather than a true rate indicator. The Fed meets quarterly to decide what that rate should be. Investors care much more about the trend in the rate rather than the rate itself. It wouldn’t make any sense for the Fed to set the fund rate at 0.345 rather than 0.25 or 0.5 and have it stay that way for months. But it’s noticeable when the rate bumps up or down by 0.25 and a big deal if it goes up or down by 0.5, a double bump. That’s what really matters.

All the other rates are calculated off these.

The reason is historical, as people have said. Money was split in half and half and half again and that made it easy to pay off simple interest charges. That was based on the Spanish currency, and the Spanish dollar was sounder and therefore more popular even after the U.S. issued its own coins. The Coinage Act of 1792 allowed for half-cents so that twelve-and-a-half cent payments were possible.

I just checked mortgage rates at Bank of America and the rates and points are all in eighths (well, they show them as decimals but they are all multiples of 0.125).

You did notice I said “most,” didn’t you? Most is not “every last one without exception.” So what’s your point?

Here’s my point.

Either the OP was incorrect in assuming that most rates are in eighths, or the question was about home mortgages. We never really found out for sure, but I assumed it was about mortgages so gave an example.

I would agree with you regarding consumer loans. I don’t know anything about business loans but I assume you are also correct there.

BTW the prime rateand the fed funds rate are both quoted in 1/4 percent increments.

Counter example, from TSB (an NZ bank):

[li]6 Months Fixed from 5.90 % p.a. [/li][li]1 Year Fixed from 5.75 % [/li][li]18 Months Fixed from 6.15 % [/li][li]2 Years Fixed from 6.28 [/li][li]3 Years Fixed from 6.99 % [/li][li]…[/li][/ul]

1/8ths is a US historical artifact? (Per Exapno Mapcase’s explanation).

Here’s what happened: I extrapolated (incorrectly it seems) from real estate to ALL interest rates.