Question
In order to help fund a loan request of $30 million for one year from one of its best customers, Derby Bank will borrow $15
In order to help fund a loan request of $30 million for one year from one of its best customers, Derby Bank will borrow $15 million by selling CDs at a promised annual yield of 3.75 percent and also borrow $15 million in the Federal funds market at todays prevailing interest rate of 3.50 percent. Credit investigation and recordkeeping costs to process this loan application were an estimated $60,000. The Credit Analysis Division recommends a minimal 1 percent risk premium on this loan and a minimal profit margin of 0.5 percent. Using the cost-plus loan pricing model, what loan rate should be charged?
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