Chapter 4: Managing and pricing non-deposit liabilities
Questions & Problems
1. Compare and contrast Fed funds transactions with RPs?
Repurchase agreements (RPs) are less popular than Fed funds and more complex. Both fed funds and Rps are instruments available for short term borrowing. However, RP agreements are collateralized loans and thus, the lender is not exposed to credit risk as they are with Federal funds transactions. Most RPs are transacted across the Fed Wire system, just as are Fed funds transactions. RPs may take a bit longer to transact then a Fed funds loan because the seller of funds (the lender) must be satisfied with the quality and quantity of securities provided as collateral.
2. What are the advantages and disadvantages of CDs as a funding source?
A CD is an interest-bearing receipt evidencing the deposit of funds in the accepting depository institution for a specified time period at a specified interest rate or specified formular for calculating the interest rate. The net result of CD sales to customers is often a simple transfer of fund from checkable deposits into CDs. Because CD normally will not be withdrawn until maturity, it provides a stabler source of fund comparing with checkable deposits. However, these funds are highly interest sensitive and often are withdrawn as soon as the maturity date arrives unless management aggressively bids in terms of yield to keep the CD.
3. What long-term nondeposit funds sources do banks and some of their closest competitors draw upon today? How do these interest costs differ from those costs associated with most money market borrowings?
Long-term nondeposit funds include mortgages, capital notes, and debentures. Generally, the interest costs on these funds sources are substantially higher than money market loans but are more stable usually.
4. What factors must the manager of a financial institution weigh in...