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Answer: Only statement 2 is correct.
## Explanation **Statement 1 Analysis:** - The special spread is actually the difference between the **general collateral rate** and the **special collateral rate**, not between the federal funds rate and general collateral rate. - The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight. - The general collateral rate applies to standard, non-special securities used as collateral in repo transactions. - Therefore, Statement 1 is **incorrect**. **Statement 2 Analysis:** - During financial crises, there is typically a "flight to quality" where investors seek safer assets. - This increased demand for high-quality collateral (general collateral) drives down the general collateral rate. - Meanwhile, the federal funds rate is set by central bank policy and may not decrease as much. - This causes the spread between the federal funds rate and general collateral rate to **widen**. - Therefore, Statement 2 is **correct**. **Conclusion:** Only Statement 2 is accurate, making Option C the correct answer.
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In a presentation to management, a bond trader makes the following statements about repo collateral:
I. Statement 1: The difference between the federal funds rate and the general collateral rate is the special spread. II. Statement 2: During times of financial crises, the spread between the federal funds rate and the general collateral rate widens.
Which of the trader's statements are accurate?
A
Both statements are incorrect.
B
Only statement 1 is correct.
C
Only statement 2 is correct.
D
Both statements are correct.