The Federal Funds Market is a market where banks, to help maintain their reserve accounts at their desired level, the Federal Reserve allows banks to actively trade reserves among themselves. Banks with surplus balances in their accounts transfer reserves to banks that need to boost their balances. These reserve balances that can be transferred between banks are called federal funds, and the rate of interest charged on the use of these funds is the federal funds rate. Federal funds neither increase or decrease total bank reserves but instead redistribute them. This redistribution allows funds that would otherwise not be used to bring a return.

foreign institutions. Financial managers compare the federal funds rate with the yields on other investments before choosing which combinations of assets to invest in or the term over which they will borrow. Interest rates on other short term financial securities, such as commercial paper and Treasury bills, often move roughly in parallel with the federal funds rate. Yields on long-term assets like corporate bonds and Treasury notes are determined in part by expectations for the federal funds rate in the future.

funds transactions can be initiated by either a lender or a borrower. A bank seeking to lend funds identifies a borrower directly, through an existing banking relationship, or indirectly, through a federal funds broker. The most common type of federal funds trans action is an overnight, unsecured loan between two financial institutions. Most overnight loans are made without a contract. The borrowing and lending banks exchange verbal agreements based on several factors, particularly their experience in doing business together, and limit the size of transactions to establish credit lines to minimize the lender's exposure to the risk of default. Such arrangements help speed up processing while keeping transaction costs as low as possible. Many overnight federal funds transactions occur under a continuing contract that is renewed automatically until either the lender or the borrower terminates it. The most commonly used method to transfer funds between depository i!

Banking relationships may affect the pricing of federal funds transactions. The relationship banking literature finds observed evidence that small borrowers (presumed to be non-financial firms) benefit by maintaining a relationship with a single bank or a small number of banks. In the case of the federal funds market, both the borrower and the lender are financial institutions. Borrowing institutions may establish relationships with particular institutions to establish that they are a good credit risk. By doing so they receive a more attractive interest rate.

The timing of the delivery and repayment of the federal funds affects the magnitude of a bank's average overdraft. This saves the bank the fee charged by the Federal Reserve for intraday overdrafts. Abstracting from a banks allowable deductible, banks are charged 27 basis points at an annual rate for intraday credit calculated on an average per minute basis. For example, suppose that s bank typically has an a

Some common words found in the essay are:
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Approximate Pages = 7 (250 words per page double spaced)