Compare and Contrast Fed Funds Transactions with Rps

1. Compare and contrast Fed funds transactions with RPs?

Less popular than Fed funds and more complex are repurchase agreements (RPs). RPs are agreements to sell securities temporarily by a borrower of funds to a lender of funds with the borrower agreeing to buy back the securities at a guaranteed price at a set time in the future. Both 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?

Negotiable CDs offer a way to attract large amounts of funds quickly and for a known time period. However, these funds are highly interest sensitive and often are withdrawn as soon as the maturity date arrives unless management aggressively bids in terms of yield to keep the CD.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 non-deposit 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?

4. What factors must the manager of a financial institution weigh in choosing among the various non-deposit sources of funding available today?

5. Problem 6, 11 and 12 (page 445-6)