Answer: interest rate the bank pays on its deposits.

## Explanation When a bank invests its excess reserves, its primary return objective is to earn a return that exceeds the interest rate it pays on its deposits. Here's why: 1. **Excess reserves** are funds that banks hold beyond the required reserve ratio set by the central bank. These funds are not earning any return when held as reserves. 2. **Cost of funds**: The bank pays interest to depositors for the funds it holds. This represents the bank's cost of funds. 3. **Investment objective**: When investing excess reserves, the bank aims to earn a return that covers its cost of funds (deposit interest) plus a margin to generate profit. 4. **Risk-free rate comparison**: While the risk-free rate is a benchmark, banks need to earn more than just the risk-free rate to cover their specific funding costs. 5. **Loan rate comparison**: The interest rate on loans represents the bank's primary lending business, but when investing excess reserves, the bank is typically looking at short-term, low-risk investments rather than making new loans. **Key concept**: Banks have a spread-based business model. They pay interest on deposits (liabilities) and earn interest on investments/loans (assets). The return on excess reserves must exceed the cost of those deposits to create positive net interest income. **Correct answer**: B - interest rate the bank pays on its deposits.

Author: LeetQuiz .