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FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities

A bank issues USD 200 million of one-year certificates of deposit at 4.00% and also has USD 300 million of overnight purchased funds at 3.50%. All other funding is ignored. What is the weighted average cost of these nondeposit funds, and what is the main liquidity trade-off of the overnight portion?

The weighted cost is 3.70%, computed as (200×4.00% + 300×3.50%) divided by 500. The overnight money is cheaper but must be refinanced every day, so it exposes the bank to rollover and liquidity risk if markets tighten.

  1. A3.70%; overnight funds are cheaper but must be rolled over daily, creating rollover riskCorrect
  2. B3.75%; overnight funds are cheaper and carry no liquidity risk
  3. C3.70%; overnight funds are more expensive but more stable
  4. D3.80%; overnight funds are cheaper but are not subject to concentration risk

Explanation

Weighted cost = (200×4.00% + 300×3.50%)/500 = (8 + 10.5)/500 = 3.70%. Overnight funding has a lower rate but must be refinanced every day, so rollover risk is highest. A simple average (3.75%) ignores the weights.

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