Explanation:
The Fed funds rate is the rate that banks use for overnight borrowing or lending of surplus funds to meet the Federal Reserve's reserve requirements. This rate is crucial for banks to maintain their reserve requirements and avoid penalties. In this scenario, since the Atlanta Small Business Bank is short of its reserve requirements, it needs to borrow funds overnight. Therefore, the Fed funds rate is the appropriate reference rate for this transaction.
Choice A is incorrect. The Treasury rate is the yield on a U.S. government debt obligation (a U.S. Treasury note or bond) that is considered risk-free as it is backed by America's full faith and credit. It does not apply to interbank lending, which is what Lee needs for meeting the reserve requirements.
Choice C is incorrect. The Repo rate, or repurchase rate, refers to the interest rate at which commercial banks borrow short-term funds from a central bank by selling securities with an agreement to repurchase them at a later date. This does not apply in this scenario as Lee needs to borrow from another bank, not from the central bank.
Choice D is incorrect. There are specific rates applicable for borrowing between banks such as Fed funds rate and LIBOR (London Interbank Offered Rate). Therefore, 'None of the above' cannot be correct.
Q.648 Xiaojun Lee is the treasury manager at the Atlanta Small Business Bank. She works in a team that supervises all the branches of the banks in Atlanta. Her core responsibility is to look after treasury transactions and to make sure the bank, at all time, meets its reserve requirements with the Federal Reserve. Today, Lee has analyzed that the bank will fall short $200 million from its reserve requirements. In order to avoid penalties, the bank must borrow some funds from another bank. Which of the following rate must Lee use as the reference rate for borrowing $200 million overnight?
A
Treasury rate.
B
Fed funds rate.
C
Repo rate.
D
None of the above.
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