Two weeks ago, Kelvin Bank granted a $200 million loan to Ynnosint, one of its best corporate clients, at a 3 5 interest rate The maturity of the loan is 6 months, and the interest rate charged is based on the historical average cost When granting the loan, Kelvin Banks liability side and corresponding interest rates are at the levels indicated below Type of funding Amount ($b) Cost Wholesale funding (interbank) 50 1 00 Customer deposits 350 1 11 Certificate of Deposit 1 month 15 1 25 Certificate of Deposit 6 months 25 1 40 Certificate of Deposit 9 months 20 1 75 Long term debt (non subordinated) 200 3 25 Subordinated debt 25 5 00 Today, Kelvin Bank observes the following market interest rates Type of funding Marginal cost of funds Wholesale funding (interbank) 1 50 Customer deposits 2 20 Certificate of Deposit 1 month 2 30 Certificate of Deposit 6 months 2 40 Certificate of Deposit 9 months 2 60 Long term debt (non subordinated) 4 00 Subordinated debt 7 00 Today is your first day as the new Head of Pricing at Kelvin, and you are tasked with estimating the profit on this loan using both (i) the historical average cost of funds method, and (ii) the marginal cost of funds method if the bank would finance the loan entirely with new customer deposits Compare the two outcomes and discuss Yesterday, a formal investigation was launched against Ynnosint, which is accused of anti competitive behaviour Ynnosint may face a fine of up to $500 million, which is a fraction of its annual revenue While the investigation is unlikely to materially affect Ynnosint, a clause in the draft loan agreement does allow renegotiation of the loan terms in the case of such investigation As the initial draft loan agreement was signed before you became Head of Pricing, you would like to take this opportunity to negotiate a better deal Assume that a mark up of 300 basis points seems adequate to cover operating expenses, shareholders required rate of return, Ynnosints credit risk, and a healthy profit margin How will you fund this loan, and what interest rate will you put forward in the renegotiation Motivate your choice of funding source(s), knowing that interest rates are expected to rise in the coming 3 months

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Two weeks ago, Kelvin Bank granted a $200 million loan to Ynnosint, one of its best corporate clients, at a 3.5% interest rate. The maturity

Two weeks ago, Kelvin Bank granted a $200 million loan to Ynnosint, one of its best corporate clients, at a 3.5% interest rate. The maturity of the loan is 6 months, and the interest rate charged is based on the historical average cost. When granting the loan, Kelvin Banks liability side and corresponding interest rates are at the levels indicated below:

Type of funding	Amount ($b)	Cost
Wholesale funding (interbank)	50	1.00%
Customer deposits	350	1.11%
Certificate of Deposit 1 month	15	1.25%
Certificate of Deposit 6 months	25	1.40%
Certificate of Deposit 9 months	20	1.75%
Long-term debt (non-subordinated)	200	3.25%
Subordinated debt	25	5.00%

Today, Kelvin Bank observes the following market interest rates:

Type of funding	Marginal cost of funds
Wholesale funding (interbank)	1.50%
Customer deposits	2.20%
Certificate of Deposit 1 month	2.30%
Certificate of Deposit 6 months	2.40%
Certificate of Deposit 9 months	2.60%
Long-term debt (non-subordinated)	4.00%
Subordinated debt	7.00%

Today is your first day as the new Head of Pricing at Kelvin, and you are tasked with estimating the profit on this loan using both (i) the historical average cost of funds method, and (ii) the marginal cost of funds method if the bank would finance the loan entirely with new customer deposits. Compare the two outcomes and discuss. Yesterday, a formal investigation was launched against Ynnosint, which is accused of anti-competitive behaviour. Ynnosint may face a fine of up to $500 million, which is a fraction of its annual revenue. While the investigation is unlikely to materially affect Ynnosint, a clause in the draft loan agreement does allow renegotiation of the loan terms in the case of such investigation. As the initial draft loan agreement was signed before you became Head of Pricing, you would like to take this opportunity to negotiate a better deal.
Assume that a mark-up of 300 basis points seems adequate to cover operating expenses, shareholders required rate of return, Ynnosints credit risk, and a healthy profit margin. How will you fund this loan, and what interest rate will you put forward in the renegotiation? Motivate your choice of funding source(s), knowing that interest rates are expected to rise in the coming 3 months.