Question

In: Finance

Why will the Federal Funds Rate (FFR) always exceed the Risk Free Rate (Rf)? If it...

Why will the Federal Funds Rate (FFR) always exceed the Risk Free Rate (Rf)? If it does not, what will happen?

Solutions

Expert Solution

Federal Fund Rate: - Rate at which banks accept and provide money to other bank to maintain Federal Reserve. It changes overnight as position of liquidity changes every day. Banks needs to maintain their fund base as per directive of FOMC (Federal Open Market Committee), which normally meets and review the position eight times in year.

Risk Free rate: - Rate which have no risk to loss of money. At fully secured investment this rate will give return. It normally provides very low return due to security feature.

Many times offices use federal Fund rate as Risk free rate which theoretically not correct. But as it works between banks hence it feels that it is Risk Free Rate but it is actually not. Many people think that Risk Free Rate does not exist in reality. Basically Government Bonds rate can be one example of Risk Free Rate. As security of these bonds provide by Government itself.

Normally Federal Fund Rate does exceed risk free rate. If it lowers than Risk Free Rate than it means there is financial stability is not exist in country, which can be risky for its investment.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Local risk-free rate (r) = 2% annual. Foreign risk-free rate (rf) = 3% annual. Exchange rate...
Local risk-free rate (r) = 2% annual. Foreign risk-free rate (rf) = 3% annual. Exchange rate = $/euro. The current market exchange rate (S0) = 1.5. Suppose the current market two-year futures price (F0) = 1.4. Is there any arbitrage profit? If there is an arbitrage profit, compute the profit. Assume that you take a loan in Germany. The loan = euro 1000. A. Yes, the arbitrage profit is higher than $70. B. Yes, the arbitrage profit is higher than...
Assume that the risk-free rate, Rf = 5%; the expected rate of return on the market,...
Assume that the risk-free rate, Rf = 5%; the expected rate of return on the market, E(Rm)= 11%; and that the standard deviation of returns on the market portfolio is σM =20%. Calculate the expected return and standard deviation of returns for portfolios that are 25%, 75%, and 125% invested in the market portfolio.
The risk-free rate is 6%, the market risk premium (=E(RM) - RF) is 8%. Assume CAPM...
The risk-free rate is 6%, the market risk premium (=E(RM) - RF) is 8%. Assume CAPM holds. A firm has a debt-to-equity ratio of 0.4. The firm's before-tax cost of debt is 10%. The firm's tax rate is 30%. If it had no debt, its cost of equity would be 16%. a) What is the beta of the firm's debt? b) What is the beta of the firm's equity if the firm had no debt? c) What is the beta...
Assume the risk-free rate is 4% (rf = 4%), the expected return on the market portfolio...
Assume the risk-free rate is 4% (rf = 4%), the expected return on the market portfolio is 12% (E[rM] = 12%) and the standard deviation of the return on the market portfolio is 16% (σM = 16%). (All numbers are annual.) Assume the CAPM holds. *PLEASE HELP WITH E-H; INCLUDED ADDITIONAL QUESTIONS FOR REFERENCE* 1a. What are the expected returns on securities with the following betas: (i) β = 1.0, (ii) β = 1.5, (iii) β = 0.5, (iv) β...
Assume that the risk-free rate, RF , is currently 8%; the market return, rm, is 12%;...
Assume that the risk-free rate, RF , is currently 8%; the market return, rm, is 12%; and asset A has a beta, of 1.10. a. Draw the security market line (SML) b. Use the CAPM to calculate the required return on asset A, and depict asset A’s beta and required return on the SML drawn in part a. c. Assume that as a result of recent economic events, inflationary expectations have declined by 2%, lowering RF and RM to 6%...
Assume that the risk-free rate, RF , is currently 8%; the market return, rm, is 12%;...
Assume that the risk-free rate, RF , is currently 8%; the market return, rm, is 12%; and asset A has a beta, of 1.10. a. Draw the security market line (SML) b. Use the CAPM to calculate the required return on asset A, and depict asset A’s beta and required return on the SML drawn in part a. c. Assume that as a result of recent economic events, inflationary expectations have declined by 2%, lowering RF and RM to 6%...
4. Assume corporate tax rate is 30% and no personal taxes. Debt is always risk-free. Risk-free...
4. Assume corporate tax rate is 30% and no personal taxes. Debt is always risk-free. Risk-free rate is 5%. a. Zoom Inc. pays 1 million in interest each year for the next 5 years. What is the present value of Zoom’s interest tax shield? b. Zoom Inc. will have free cash flow 10 million in the next year and its free cash flow will grow at a rate of 4% per year thereafter. Zoom has a deb tequity ratio of...
What is the federal funds rate? Would you classify the federal funds rate as a policy...
What is the federal funds rate? Would you classify the federal funds rate as a policy instrument, and operating target, an intermediate target, or a policy goal? Explain.
Why has the Federal Reserve chosen to focus on the federal funds rate rather than some...
Why has the Federal Reserve chosen to focus on the federal funds rate rather than some other interest rate as a tool of monetary policy?
Discuss the relationship between a federal funds target and a federal funds equilibrium rate. If the...
Discuss the relationship between a federal funds target and a federal funds equilibrium rate. If the target is greater than the equilibrium rate, what happens? If the target is below the equilibrium rate, what happens? Can the Fed set the federal funds rate (or any other interest rate) independent from market supply and demands for funds?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT