How is cost of funds calculated?
Credit:Justin LewisStoneGetty Images
Q:

How is cost of funds calculated?

A:

Quick Answer

Cost of funds is calculated by taking the total annualized interest expense divided by average interest bearing deposits and other interest bearing borrowings, plus non-interest bearing deposits. This equation does not include capital, although many financial institutions will include capital in an assets calculation.

 Know More

Full Answer

Cost of funds refers to the interest rate paid by financial institutions for the funds they use in their business. When financial institutions have a lower cost of funds, they are able to offer consumers lower interest rates for short-term and long-term borrowing.

When a consumer refers to cost of funds, they are generally referring to the true cost of a loan. In that case, a simple loan calculator, such as the one found Bankrate.com, can quickly provide consumers with the approximate total cost of a loan. The total cost of a loan is the loan amount (known as the principal) plus all of the accumulated interest that will be paid on the loan if it is held to maturity. The formula for calculating the simple interest cost of a loan is i = Prt, where i (the total interest on the loan) = Principal x rate of interest x length of time.

For example, if $25,000 were to be borrowed at 6 percent for five years, the formula would look like this:

i = Prt

i = $25,000 x 0.06 x 5

i = $7,500

The total amount of the loan can be found by taking the original principal amount ($25,000) and adding the total interest amount ($7,500). The resulting figure ($32,500) is the total cost of the loan. When dealing with compound interest calculations, it is better to consult a financial professional to ensure the figures are correct.

Learn more about Currency & Conversions

Related Questions

  • Q:

    What is the impact of high caregiver strain on Canada's health care system?

    A:

    Role overload and caregiver strain in Canada has a bearing on an individual employee’s health as well as the workplace in terms of the cost of benefits and the time spent away from work, according to Region of Peel. As of 2014, Canada’s health care system loses up to $1.1 billion annually in costs related to caregivers experiencing strain, as shown in a study reported in Region of Peel.

    Full Answer >
    Filed Under:
  • Q:

    What are the functions of financial institutions?

    A:

    Financial institutions provide financing, facilitate economic transactions, issue funds, offer insurance and hold deposits for businesses and individuals. Financial institutions are private or public organizations that serve as an intermediary between savers and borrowers of funds. The two primary types of financial institutions are credit unions or depository banks and non-depository mutual funds and insurance companies. Banks and equity markets are the fundamental institutions in most financial systems.

    Full Answer >
    Filed Under:
  • Q:

    How do you calculate M2?

    A:

    According Investopedia, M2 is a measure of money supply that includes M1 (cash and checking deposits) as well as near money (savings deposits, money market mutual funds and other interest-bearing deposits).

    Full Answer >
  • Q:

    How do you buy stocks and retire before 50?

    A:

    To buy stocks and retire before the age of 50, rely on compounding of interest to build your funds over time, notes Steve Sjuggerud's Daily Wealth. For example, if you invest $10,000 and get a return of 18 percent, you have a million dollars 28 years later.

    Full Answer >
    Filed Under:

Explore