This assignment will demonstrate the importance of calculating the all-in-cost of borrowed funds (liabilities such as deposits and CDs) and net return of earning assets (loans and bonds).

The all-in costs includes costs associated with the procurement of deposits. In the case of passbook savings, it will include interest expense and operating costs related to advertising, originating and maintaining the account. In the case of demand deposits, only operating costs are relevant since demand deposits pay no interest. Thus, all-in-cost includes both direct and indirect costs.

Net returns on loans are the net interest income earned on loans less costs associated with advertising, originating and maintaining loans.

The goal of a bank is to maximize the difference between average net return of earning assets and the average all-in cost of borrowed funds.

All-in-Cost of Liabilities (Borrowed funds)

Fill in the worksheet below to estimate the all-in-cost of the liabilities using the same results of Quarter 2 of Assignment 1 of your Autosim that was created using the Assignments Regional Bank Template.

• The contract rate is the rate quoted to the client, expressed as an annual percentage rate (enter twelve percent as 12.00).
• Express operating and advertising costs and FDIC premium as an annualized percentage of the associated account balance. For example, a cost of $2 per quarter associated with a $100 account balance should be entered here as 8.00 percent per year.
• Assume operating costs for many loan and deposit types reflect both the account balances and recent changes in those balances. As long as your banks account balances are not swinging wildly, you can safely ignore the change component of operating costs, and assume that all costs are proportional to outstanding account balances.
• Be careful to annualize all expense and loss ratios. That is, the quarterly operating cost ratio must be multiplied by four to compare an annual operating cost ratio with an annual contract rate of interest.
• It will save you some computations to know that the transaction cost per dollar bought is the same for FFP, FFS, and negotiable CDs.
• Fee income is for demand deposits only.

Please see sections 4.4 and 6.1 of your student manual for additional details.

Worksheet 1: Liability Costs
For each of the following liabilities, compute the "all-in" cost of new loanable funds.
	Federal Funds Purchased	Demand Deposits Retail	Demand Deposits Corporate	Passbook Savings	Negotiable Certificates of Deposit	Retail Certificate of Deposits	Long-term Retail Time Deposits
	FFP	DDR	DDC	PASS	1-period	2-period	4-period	RCD	IRA
1. Contract Rate
2. Operating Costs
3. Advertising
4. Fee Income
5. FDIC Premium
6. All-in Cost of These Deposits
7. Reserve Requirement (%)
8. Average Cost of Loanable Funds

All-in-all Cost of Assets

Fill in the worksheet below to estimate the all-in-cost of the liabilities using the same results of Quarter 2 of Assignment 1 of your Autosim that was created using the Assignments Regional Bank Template.

The contract rate is the rate quoted to the client, expressed as an annual percentage rate (enter ten percent as 10.00).Express operating and advertising costs as an annualized percentage of the associated account balance. For example, a cost of $2 per quarter associated with a $100 account balance should be entered here as 8.00 percent per year.Be careful to annualize all expense and loss ratios. That is, the quarterly operating cost ratio must be multiplied by four to compare an annual operating cost ratio with an annual contract rate of interest.

Worksheet 2: Net Return of Assets
Compute the net return for each of the following assets.
	Federal Funds Sold	Fixed-Rate Loan	Floating-Rate Loan	Installment Loan	Mortgage Loan	Government Bonds
	FFS	FR	FL	INST	MORT	BONDS
1. Contract Rate
2. Operating Costs
3. Advertising
4. Default Rate
Net Return on Individual Assets