Overnight rate is the interest rate that is charged on loan if a bank borrows a loan overnight. It is also the name given to the interest rate at which a bank borrows money from another bank in the overnight market.
1) The overnight rate is the lowest available interest rate.
2) It is only available to the most creditworthy institutions.
3) The overnight rate maintains federally-mandated reserve requirements of a bank. By maintaining reserve requirements the banking system remains stable and liquid.
4) The overnight rate can be used as a good predictor for the movement of short-term interest rates for consumers in the broader economy. The higher the overnight rate, the more expensive it is to borrow money.
The overnight borrowing money helps the bank to overcome their shortfalls in liquid cash.
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