FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities
A bank issues a USD 50 million negotiable CD at a 4.00% annual rate and simultaneously buys federal funds at 4.20% for the same term. A treasurer compares all-in costs after a 0.10% FDIC-type assessment and a 3% reserve-like liquidity buffer held at zero return applied only to the CD. What is the approximate effective cost of the CD funds, using cost = rate / (1 - buffer) + assessment?
Dividing the 4.00% rate by 0.97 gives 4.124%, and adding the 0.10% assessment yields about 4.22%. The buffer raises cost because only 97% of the funds can be invested at a return.
- A4.10%
- B4.22%
- C4.33%Correct
- D4.13%
Explanation
Rate/(1-0.03) = 4.00/0.97 = 4.124%. Adding 0.10% gives 4.224%. So the correct figure is about 4.22%, which is option index 1 as listed.
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