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Credit investigation and record keeping costs

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In order to help fund a loan request of $40 million for one year from one of its best customers, Andover Bank will borrow $20 million from selling CDs at a promised annual yield of 3 percent and also borrow $20 million in the Federal funds market at today's prevailing interest rate of 2.8 percent. Credit investigation and recordkeeping costs to process this loan application were an estimated 0.2% of the loan amount. The Credit Analysis Division recommends a minimal 0.5 percent risk premium on this loan and a minimal profit margin of 1.25 percent. Using the cost-plus loan pricing model, what loan rate should be charged? (Show sufficient detail in order to receive credit)

Reference no: EM133109712

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