Question 19

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

A sweep account is characterized by the automatic transfer of funds from a checking account into overnight securities when the balance exceeds a predetermined threshold. This mechanism allows for better management of idle cash and maximizes returns on excess balances.

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

This option is incorrect as it describes a scenario related to banking liquidity rather than the specific functionality of a sweep account. Sweep accounts focus on optimizing the use of available funds rather than restrictions on transfers due to deposit losses.

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

This choice is also incorrect, as it pertains to mortgage lending rather than banking account management. Sweep accounts are not related to mortgage products but are instead concerned with the efficient use of cash in transaction accounts.

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

While this option discusses a demand deposit account, it does not capture the essence of a sweep account. Sweep accounts are specifically designed to manage excess funds rather than solely being a structure for treasury transactions.

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

This statement accurately describes a key feature of sweep accounts, highlighting how they function to optimize idle cash. By investing excess funds in overnight securities, sweep accounts help clients earn interest on their balances while maintaining liquidity.

Conclusion

The correct answer is definitive as it precisely encapsulates the operational mechanism of sweep accounts, which is to invest excess balances in overnight securities. All other options either misrepresent the nature of sweep accounts or address unrelated financial concepts, reinforcing the uniqueness of option D as the only accurate description.