Factors Influencing Yield Spreads and ...
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Funding markets are markets from which debt issuers borrow to meet their financial needs. Banks have access to funds obtained from the retail market, which are the deposits from their customers. However, these financial institutions also need to raise funds from the central bank, interbank deposits, and certificates of deposit.
Central Bank Funds
The central bank funds market allows banks with surplus funds to lend other financial institutions for maturities of up to one year at the central bank funds rates. In the US, this is often referred to as the Fed Fund’s rate.
Interbank Markets
The interbank lending market is a market in which financial institutions extend unsecured loans to one another. Most interbank loans are for maturities of one week or less – the vast majority being overnight loans – and are contracted at the interbank loan rate.
Certificates of Deposit
A certificate of deposit (CD) represents a specified amount of funds on deposit for a specified maturity and interest rate. CDs are important sources of funds for financial institutions. Non-negotiable CDs pay a deposit plus interest rate at maturity, and a withdrawal penalty is paid if the funds are withdrawn before maturity. On the other hand, a negotiable CD allows any depositor to sell the CD in the open market before maturity.
Question
Withdrawal penalties are most likely imposed on:
- Non-negotiable certificates of deposit.
- Negotiable and non-negotiable certificates of deposit.
- Negotiable and non-negotiable certificates of deposit and interbank deposits.
Solution
The correct answer is A.
Only non-negotiable certificates of deposit have a withdrawal penalty that is paid if the funds are withdrawn before maturity.
Sergio Torrico
2021-07-23
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2021-07-17
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2021-07-16
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2021-06-28
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2021-03-24
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2021-03-18
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