Illustrate the average variable cost of funds

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A retail bank's sources of funds include savings, time, and checking (current) deposits. In June 2011, Hang Seng Bank, a leading Hong Kong bank, quoted interest rates of 0.01% on savings accounts, 0.15% on a 12-month time deposit, and nothing on checking accounts.

Suppose that the bank incurs an additional 0.2% cost to administer checking accounts, and 0.1% cost for savings accounts and time deposits. List the three sources of funds in ascending order of annual cost per dollar of funds.

Suppose that the bank has $2 billion of savings deposits, $5 billion of time deposits, and $3 billion of checking deposits. On a diagram with amount of funds in billions of dollars (from 0 to 10 billion) as the horizontal axis and cost in millions of dollars as the vertical axis, illustrate the (i) average variable cost of funds, and (ii) marginal cost of funds.

Reference no: EM133082384

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