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Financial Markets Test

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CHAPTER 17: Bank Operations: 1. Using a typical balance sheet identify the main sources and uses of bank funds. What alternatives does a bank have if it needs temporary funds? What is the most common reason that banks issue bonds? (15)

On a typical balance sheet, the main sources of banks funds (liabilities) are the following: * Transaction deposits * Savings deposits * Time deposits * Money market deposit accounts * Federal funds purchased * Repurchase agreements * Eurodollar borrowings
Its main uses of funds (assets) are the following: * Cash * Loans * Investment securities * Federal funds sold * Repurchase agreements * Eurodollar loans * Fixed assets
If a bank needs to get temporary funds, the alternatives are the following: * Federal fund market * Discount window * Repos * Eurodollar borrowings
The most common reason banks issue bonds is to purchase fixed assets. Define federal funds and federal funds rate. Who sets the federal funds rate? Why do banks invest in securities, even though loans typically generate a higher return? (5)
Federal funds are loans that banks make to each other to meet the reserve requirement set by the Federal Reserve. These loans are usually overnight, since the reserve requirement needs to be met at the end of each day. The federal funds rate is the interest rate on the loan. The rate is not directly set by anyone, but dictated by the market. The rate changes in response to changes in supply and demand conditions, but the Fed does influence the rate by adjusting the money supply. Banks invest in securities due to their liquidity. Securities provide banks with liquidity because they can be easily sold on the secondary market and many of them carry a low risk. Due to those factors, the securities can be utilized to minimize

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