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Question
A bank has a listed prime rate of 7 percent. They have estimated that the marginal cost of raising funds is 5 percent, their default risk premium on a loan is 1.5 percent and that they want a profit margin of 2 percent. They have also estimated that the term risk premium is 0.5 percent. What is the interest rate this bank will charge if they use the price leadership model (and the prime rate is their base rate)?
A. 8.5 percent
B. 9 percent
C. 12 percent
D. 9.5 percent
E. None of the options is correct.
Answer
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