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In setting its funding strategy, a bank is comparing the effective cost (on yearly basis; percentage points) of two different sources of funding: a demand
In setting its funding strategy, a bank is comparing the effective cost (on yearly basis; percentage points) of two different sources of funding: a demand deposit account (DDA) and a certificate of deposit (CD). Consider the following data. - Yearly average balance of the DDA: $10,000. - Issue price of the CD (proceeds): $10,000. - Maturity of the CD: 1 year. - Interest paid on the CD: 5%. - Reserve requirements: 10%. - Processing costs on the DDA: $350 per year. - Fees earned for services provided on DDA: \$10 per month. A.1. Calculate the effective cost rate of the DDA (+ 0.8 points; penalty: -0.10). (a) 2.30%. (b) 4.70%. (c) 2.56%. (d) 3.50%. A.2. Calculate the effective cost rate of the CD(+0.8 points; penalty: -0.10). (a) 5.56%. (b) 5.00% (c) 8.50%. (d) 7.30%
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