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

A bank's treasurer needs overnight funding and borrows reserve balances unsecured from another depository institution in the interbank market, at a rate negotiated between the two parties. Which description best fits this transaction?

This is a federal funds purchase. Fed funds are unsecured, usually overnight loans of reserve balances between depository institutions at a negotiated rate. A repo would need collateral, a discount window loan comes from the central bank, and a CD is a deposit instrument.

  1. AA federal funds purchase, an unsecured overnight borrowing of reserve balancesCorrect
  2. BA repurchase agreement, a secured borrowing collateralized by Treasury securities
  3. CA discount window loan, a borrowing from the central bank at the primary credit rate
  4. DA negotiable certificate of deposit, a tradable time deposit issued to investors

Explanation

Federal funds are unsecured, typically overnight, loans of reserve balances between depository institutions at a negotiated rate. A repo requires securities as collateral, which is absent here. A discount window loan is from the central bank, not another bank.

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