A bank has a listed prime rate of 7 percent.They have estimated that the marginal cost of raising funds is 5 percent,their default risk premium on a loan is 1.5 percent and that they want a profit margin of 2 percent.They have also estimated that the term risk premium is 0.5 percent.What is the interest rate this bank will charge if they use the price leadership model (and the prime rate is their base rate)?

Question

Quizplus · Accepted Answer

The interest rate charged using the price leadership model is calculated by adding the prime rate (7%) to the default risk premium (1.5%), the profit margin (2%), and the term risk premium (0.5%). This totals to 11%, which is not listed as an option, so the correct choice is "None of the options is correct."

A Bank Has a Listed Prime Rate of 7 Percent