Question

Central Bank plans to launch a new deposit campaign next week in hopes of bringing in from $150 million to $650 million in new deposit money, which it expects to invest at a 11.75 percent yield. Management believes that an offer rate on new deposits of 5.75 % would attract $150 million in new deposits and rollover funds. To attract $200 million the bank would probably be forced to offer 6.5%. The bank forecasts suggest that $350 million might be available at 7 %, $475 million at 7.5%, $550 million at 8.5 % and $650 million at 9.5 %. What volume of deposits should the bank try to attract to ensure that marginal cost does not exceed marginal revenue?

Answer 1

ANSWER

Interest rate paid	Deposits received (million)	Interest income paid (million)	Yield rate earned	Yield income earned (million)	MR (of yield income) (million)	MC of interest income paid (million)	Net Benefit (million) (= yield income earned - interest amount paid)
5.75%	150	8.625	11.75%	17.63			9
6.50%	200	13	11.75%	23.50	0.1175	0.09	10.50
7%	350	24.5	11.75%	41.13	0.1175	0.08	16.63
7.50%	475	35.625	11.75%	55.81	0.1175	0.09	20.19
8.50%	550	46.75	11.75%	64.63	0.1175	0.15	17.88
9.50%	650	61.75	11.75%	76.38	0.1175	0.15	14.63

It can be seen that MC increases to be more than MR, when deposits received increases to be more than $475 Million. It causes decrease

So,

The optimum amount of deposits to be attracted = $475 Million ( at 7.5% interest rate offered)

At this volume of deposits,

Yield income earned = 475*11.75% = $55.81 Million

Interest income paid = 475*7.5% = 35.63 Million

So,

Net benefit = 55.81 - 35.62

Net benefit = $20.19 Million

Above net benefit is highest as per the table at different deposits, so the central bank should attract $475 Million deposits at 7.5% interest rate.

================

DEAR STUDENT,

IF YOU HAVE ANY QUERY PLEASE ASK ME IN THE COMMENT BOX,I AM HERE TO HELP YOU.PLEASE GIVE ME POSITIVE RATING..

****************THANK YOU****************