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

A bank treasurer compares funding through negotiable certificates of deposit (CDs) with funding through federal funds purchased. Which statement best describes a key difference relevant to liquidity risk management?

Federal funds purchased are usually overnight unsecured borrowings that must be renewed every day, so they carry far greater rollover risk than term negotiable CDs, whose funding is fixed until maturity. CDs are not secured by Treasuries and are not redeemable early at par.

  1. AFederal funds purchased are typically overnight unsecured borrowings that must be rolled daily, creating greater rollover risk than term CDsCorrect
  2. BNegotiable CDs are secured by pledged Treasury securities, whereas federal funds purchased are unsecured
  3. CFederal funds purchased are insured by the deposit insurer, whereas negotiable CDs are not
  4. DNegotiable CDs can be redeemed by the holder at par at any time before maturity

Explanation

Fed funds purchased are mostly overnight, unsecured interbank borrowings, so the bank must refinance every day. Term CDs lock in funding until maturity. The claim that CDs are secured is wrong; they are unsecured deposit liabilities. Holders of negotiable CDs sell them in the secondary market rather than redeeming early.

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