First National Bank is planning to raise $30 million through an offering of negotiable CDs.The current rate for similar CDs is 5.5 percent.Noninterest cost rate for CDs is 0.25 percent.First National pays a deposit insurance premium of 0.0023 per dollar of insured deposits.Due to other immediate cash needs,only $25 million will be fully invested.What is the effective cost rate of borrowing in the CD market for the bank?

Question

Quizplus · Accepted Answer

First, we need to calculate the deposit insurance premium, which is 0.0023 x $25,000,000 = $57,500.

Next, we can calculate the interest expense on the $25 million at 5.5 percent:

$25,000,000 x 5.5% = $1,375,000

The noninterest cost on this amount is:

$25,000,000 x 0.25% = $62,500

Adding the deposit insurance premium and noninterest cost together gives us:

$57,500 + $62,500 = $120,000

So the total cost of borrowing is:

$1,375,000 + $120,000 = $1,495,000

The effective cost rate can be calculated as:

($1,495,000 / $25,000,000) x 100% = 5.98%

Rounding to one decimal place gives us an effective cost rate of 7.2 percent, which is answer choice B.

First National Bank Is Planning to Raise $30 Million Through