Difficulty: Easy

Average Score: 84%

Which of the following is a characteristic of a sweep account?

Rationale

Balances above a certain amount in a checking account are daily invested in overnight securities.

Sweep accounts are designed to maximize the interest earned on funds by automatically transferring excess balances into higher-yielding investments, such as overnight securities, typically on a daily basis. This feature allows account holders to optimize their cash management while maintaining liquidity.

A (The loss of deposits from the banking system restricting the amount of funds that banks could transfer) YOUR ANSWER

This statement relates to broader banking issues and regulations rather than the specific features of sweep accounts. Sweep accounts focus on managing excess funds rather than addressing the implications of deposit losses within the banking system.

B (A new class of residential mortgages offered to borrowers with less-than-stellar credit records) YOUR ANSWER

This choice describes a type of mortgage product and is unrelated to the functionality of a sweep account. Sweep accounts pertain to cash management, not lending or mortgage options, making this description irrelevant to the question.

C (A type of structure of a demand deposit account offered for treasury transactions) YOUR ANSWER

While this choice mentions a demand deposit account, it inaccurately describes the nature of sweep accounts. Sweep accounts are specifically designed for efficient cash management through automatic transfers, rather than being limited to treasury transactions.

D (Balances above a certain amount in a checking account are daily invested in overnight securities) CORRECT

This option accurately represents the primary function of a sweep account, which seeks to enhance the yield on funds by investing excess balances in short-term, low-risk securities. This characteristic is essential for businesses and individuals looking to maximize their cash efficiency.

Conclusion

Sweep accounts facilitate optimal cash management by automatically investing excess balances from checking accounts into overnight securities, thereby generating additional interest income. The other options focus on unrelated concepts, such as banking regulations, mortgage products, or specific account structures, which do not capture the essence of sweep accounts. Thus, option D is the only choice that correctly defines this financial tool.

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