Question
In order to help fund a loan of $10 million for one year from its best customers, Loan Star Bank sold negotiable CDs to its
In order to help fund a loan of $10 million for one year from its best customers, Loan Star Bank sold negotiable CDs to its business customers in the amount of $6 million at a promised annual yield of 3.50 percent and borrowed $4 million in the federal funds market from other banks as today's prevailing interest rate of 3.25 percent. Capital investigation and record keeping costs to process this loan application were an estimated $25,000. The Credit Analysis Division recommends a minimal 1 percent risk premium on this loan and a minimal profit margin of one-fourth of a percentage point. The bank prefers using cost-plus loan pricing in this cases. What loan rate would it charge? Show all calculations.
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