What are the major sources of purchased funds? Can using purchased funds change a bank's profitability?...

What are the major sources of purchased funds? Can using purchased funds change a bank's profitability? Its risk level? Explain.

Expert Solution

Purchased funds are those funds which are rate sensitive funding sources for the bank.purchased funds are highly expensive and highly volatile sources of funds and they will be prone to replacement as the interest rate fluctuates. Interest rate on these purchased funds are higher than the core deposits.

Major source of purchase funds are-

A. Money market investments for the bank

B. Short term fixed deposit

C. Call money market

These purchased funds are highly volatile and they will be reacting to the interest rate change to the maximum level.

Yes, they can have the impact of changing the profitability of the bank in the short run because these are taken on working capital basis.

the risk level of the purchase funds are very high because they are highly volatile and they will be reacting to the interested change to the optimum manner but the bank will have the flexibility of replacing them quickly

jeff jeffy answered 2 years ago

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