Question 1

Primary credit is defined as loans available for short terms and normally considered beneficial for the borrower because it carries an interest rate slightly below the target Fed funds rate.

Accepted Answer

Primary credit is offered to depository institutions by the Federal Reserve, typically at a rate above the target federal funds rate, intended for short-term liquidity purposes.

Question 2

CDs sold by some of the largest foreign banks active in the United States through their branches are called Yankee CDs.

Accepted Answer

Yankee CDs are CDs sold by foreign banks through their branches in the United States.

Question 3

In recent years,financial institutions have gotten better at managing interest rate risk.

Accepted Answer

Financial institutions have started using different financial instruments to manage and hedge against interest rate risk, including interest rate swaps, futures contracts, and options. They have also improved their risk management practices and governance structures to address interest rate exposures. Therefore, in recent years, financial institutions have become better at managing interest rate risk.

Question 4

Nondeposit funds do have the advantage of quick availability compared to most types of deposits,but are not as stable a funding source for banks as are time and savings deposits.

Accepted Answer

Nondeposit funds, such as demand deposits and money market funds, can be quickly withdrawn by customers, making them less stable as a funding source for banks compared to longer-term deposits.

Question 5

There are no restrictions on getting a Federal Reserve loan and because it is the cheapest source of short-term funds,most banks use this source of funds exclusively.

Accepted Answer

There are restrictions on getting a Federal Reserve loan, including having eligible collateral and meeting certain criteria. Additionally, while the Federal Reserve loan may be a cheap source of funds, banks also use other sources such as deposits and wholesale funding.

Question 6

Longer-term federal funds contracts which are automatically renewed each day unless either the borrower or the lender decides to end the agreement are called term loans.

Accepted Answer

The definition given is actually for overnight loans, not term loans. Term loans have a specified maturity date and do not automatically renew each day.

Question 7

Interest rates in the Repurchase Agreement (RP)market are quoted on a 360-day basis.

Accepted Answer

Interest rates in the Repurchase Agreement (RP) market are commonly quoted on a 360-day basis, which is also known as the "banker's year." This differs from the standard 365-day year used in most other financial transactions.

Question 8

Large banks depend more on nondeposit borrowings than small banks.

Accepted Answer

Large banks typically have more access to various funding sources, including nondeposit borrowings such as bonds and commercial paper, compared to small banks. This allows them to more heavily rely on nondeposit borrowings for their funding needs.

Question 9

Although there is an active federal funds spot market,there is currently no associated futures market for federal funds.

Accepted Answer

There is an associated futures market for federal funds, which is traded on the Chicago Mercantile Exchange (CME).

Question 10

The size of a financial institution has an effect on the type of nondeposit funding source it considers.For example,larger depository institutions have the credit standing to sell the largest negotiable CDs,while the Fed funds market is suitable for smaller institutions.

Accepted Answer

Larger institutions have a higher credit standing which allows them to sell larger negotiable CDs, while smaller institutions typically rely on the Fed funds market for nondeposit funding sources.

Question 11

According to the FDIC Improvement Act,undercapitalized U.S.banks cannot be granted discount window loans for more than 60 days in each 120-day period.

Accepted Answer

The FDIC Improvement Act does limit the amount of time undercapitalized banks can receive discount window loans to 60 days in each 120-day period.

Question 12

When the general credit conditions are tight,there is a possibility that not every borrower will be accommodated by lenders.This chance of credit rationing is referred to as credit availability risk.

Accepted Answer

This statement is true as credit availability risk refers to the possibility of borrowers being unable to obtain credit due to tight credit conditions and lenders not being able to accommodate all borrowers.

Question 13

Repurchase Agreement (RPs)transactions are perceived to be less risky than equivalent Federal funds transactions.

Accepted Answer

Repurchase agreements involve the transfer of securities as collateral for short-term loans, making them less risky than unsecured Federal funds transactions. The collateral helps to mitigate the counterparty risk involved in these transactions. Therefore, RPs are generally considered to be less risky than equivalent Federal funds transactions.

Question 14

Only federal regulators can limit the terms (amount,frequency,and use)of borrower funds by the U.S.depository institutions.

Accepted Answer

State regulators also have the authority to impose restrictions on the terms of borrower funds by U.S. depository institutions, in addition to federal regulators.

Question 15

The main use of federal funds today is still the traditional one.Federal funds provide a mechanism that allows banks short of legal reserves to satisfy the reserve requirements or to satisfy a loan demand by tapping into immediately available funds from other institutions possessing temporarily idle funds.

Accepted Answer

Federal funds are still primarily used for interbank lending to help banks meet their reserve requirements or to borrow funds for short-term needs.

Question 16

Negotiable CDs are restricted to short maturities-from seven days to one or two years.

Accepted Answer

Negotiable CDs typically have maturities ranging from seven days to one or two years, making them suitable for short-term investments.

Question 17

Under current federal law,commercial banks in the United States can issue commercial paper as direct obligations of the banks.

Accepted Answer

Commercial banks in the United States are generally not allowed to issue commercial paper because commercial paper is an unsecured form of promissory note that requires the issuer to have a high credit rating, and regulations separate the types of activities commercial banks can engage in from those of corporate entities that typically issue commercial paper.

Question 18

Loans from the Fed funds market must be backed by collateral.

Accepted Answer

The Fed funds market involves overnight loans between banks of their excess reserves, which do not require collateral.

Question 19

One of the factors to consider when a bank chooses among the nondeposit funding sources is the relative cost.In general,managers prefer to borrow from the cheapest source of funds,although other factors do play a role.

Accepted Answer

This statement is true. Banks prefer to borrow from the cheapest source of funds to minimize their cost of funding. However, other factors such as the availability, flexibility, and maturity profile of the funding source may also influence their decision.

Question 20

Seasonal credit discount window loans generally have the highest interest rates.

Accepted Answer

Seasonal credit discount window loans are typically offered at an interest rate that is based on an average of certain market rates, making it not necessarily the highest rate compared to primary or secondary credit rates, which are often higher to discourage routine borrowing by banks in good standing.

Quiz 13: Managing Nondeposit Liabilities