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Determine the cost-plus loan pricing

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Reference no: EM131723235

Question: In order to help fund a loan request of $10 million for one year from one of its best customers, Lone Star Bank sold negotiable CDs to its business customers in the amount of $6 million at a promisedannual yield of 5.75 percent and borrowed $4 mil-lion in the Federal funds market from other banks at today's prevailing interest rate of 5.40 percent. Credit investigation and recordkeeping costs to process this loan application were an estimated $25,000. The Credit Analysis Division recommends a minimal 1 percent risk premium on this loan and a minimal profit margin of one-fourth of a percentage point. The bank prefers using cost-plus loan pricing in these cases. What loan rate should it charge?

Reference no: EM131723235

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