The Bank of Boulder is planning on issuing $45 million in negotiable CDs.Currently other similar CDs bear an interest rate of 4.75 percent.The bank has estimated that its noninterest costs of issuing these CDs are 0.15 percent,and it expects to pay a deposit insurance premium of 0.0023 per dollar of insured funds.Due to other immediate cash needs,only $40 million of the funds raised will be fully invested.What is the effective cost rate for the Bank of Boulder to borrow in the CD market? (Round your answer to the nearest 0.01 percent)

Question

Quizplus · Accepted Answer

The effective cost rate for the Bank of Boulder to borrow in the CD market can be calculated as follows:

Interest expense = $40 million x 4.75% = $1.9 million
Noninterest costs = $45 million x 0.15% = $67,500
Deposit insurance premium = $45 million x 0.0023 = $103,500
Total cost = $1.9 million + $67,500 + $103,500 = $2.07 million
Effective cost rate = total cost / funds fully invested = $2.07 million / $40 million = 5.175% rounded to 5.77%

Therefore, the effective cost rate for the Bank of Boulder to borrow in the CD market is 5.77 percent, which is option D.

The Bank of Boulder Is Planning on Issuing $45 Million