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Problem - Rosy Bank is a regional bank that lends primarily to small corporations. In the past week its credit department received a number of loan applications from different companies. After careful consideration, the loan officer approves 10 applications with a total volume of $250 million. Each loan is $25 million. All loans have equal risk and an interest rate of 4%. Before sending the final approval to each company, you are asked to find an appropriate funding method. Your team in the liability management department lists the following funding options. Note that the amount listed is the exact amount to be raised using this funding option.
Funding option
Amount ($ million)
Interest rate
3-year CD
50
2%
5-year bond
100
2.25%
10-year bond
150
2.5%
250
3.5%
Required -
a. Calculate the marginal profit and the total profit for each funding option. Show your calculations.
b. Carefully discuss the bene?ts and drawbacks of each funding option.
c. Discuss your preferred funding option and motivate your choice. How many $25 million loans will be funded using your funding option?
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