Explanation:
| Funds Raised | Average Rate Paid | Total Interest | Marginal Cost | Change in Total Cost | Expected Revenue | Difference Expected less Marginal | Total Additional Profit |
|---|---|---|---|---|---|---|---|
| 6,000,000 | 3.00% | 180,000 | 180,000 | 3.00% | 7.00% | 4.00% | 240,000 |
| 10,000,000 | 3.25% | 325,000 | 145,000 | 3.63% | 7.00% | 3.38% | 375,000 |
| 12,000,000 | 3.50% | 420,000 | 95,000 | 4.75% | 7.00% | 2.25% | 420,000 |
| 15,000,000 | 3.75% | 562,500 | 142,500 | 4.75% | 7.00% | 2.25% | 487,500 |
| 20,000,000 | 5.50% | 1,100,000 | 537,500 | 10.75% | 7.00% | −3.75% | 300,000 |
The calculations are as follows:
Total interest = Funds raised × Average Rate Paid
= 6,000,000 × 3.00% = 180,000
Marginal cost = Change in total cost
= New interest rates × Total funds raised at new rate − Old interest rate × Total funds raised at old rate
= (3.25% × 10,000,000) − (3.00% × 6,000,000) = 145,000
Alternatively, marginal cost is the additional interest earned in new deposit money.
Ultimate access to all questions.
Q.4089 XYZ Bank establishes that it can attract the following amounts of deposits if it agrees to offer new depositors and those rolling over their maturing term deposits the interest rates in the following table:
| Expected Amount of New Deposits | Rate of Interest Offered to Depositors |
|---|---|
| 6,000,000 | 3.00% |
| 10,000,000 | 3.25% |
| 12,000,000 | 3.50% |
| 15,000,000 | 3.75% |
| 20,000,000 | 5.50% |
Management hopes to invest any new deposits raised in loans yielding 7%. How far should this thrift institution go in raising its deposit interest rate to maximize total profits (excluding operational costs)?
A
0.0325
B
0.035
C
0.0375
D
0.055
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