FRM Part II · FRM Exam Part II · Liquidity Transfer Pricing: A Guide to Better Practice
A bank's treasury sets the funds transfer price for a 5-year fixed-rate loan using the matched-maturity funding curve of 4.00% and a liquidity premium of 0.60% for that tenor. The client loan rate is 6.10%. Ignoring credit and operating costs, what is the loan unit's net spread after the liquidity charge?
The loan unit's net spread is 1.50%. The transfer price is the 4.00% matched-maturity rate plus the 0.60% liquidity premium, totaling 4.60%, which is deducted from the 6.10% client rate. Ignoring the liquidity premium would overstate the margin at 2.10%.
- A1.50%Correct
- B2.10%
- C2.70%
- D1.90%
Explanation
Total transfer charge = 4.00% + 0.60% = 4.60%. Net spread = 6.10% - 4.60% = 1.50%. Omitting the liquidity premium gives 2.10%, which is wrong because the unit must bear the liquidity cost.
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