Question
Banks and other lending affiliates within the holding company of A are reporting heavy loan demand this week from companies in the region B that
Banks and other lending affiliates within the holding company of A are reporting heavy loan demand this week from companies in the region B that are planning a significant expansion of inventories and facilities before the beginning of the fall season. The holding company plans to raise $2800 million in short-term funds this week, of which about $2850 million will be used to meet these new loan requests. Interbank funds are currently trading at 3%, negotiable CDs are trading in the stock market at 3.5%, and foreign borrowings are available at all maturities under one year at 4.5%. Noninterest costs are estimated at 0.5 % for interbank, 1 % for CDs; 1.5 % for foreign borrowings. Calculate the effective cost rate of each of these sources of funds and make a management decision on what sources to use. Be prepared to defend your decision.
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