What Are The Relative Advantages And Disadvantages Of Each Of These Funding Sources?
Glenwood National Bank is short of required legal reserves. The bank’s money
manager estimates it will need to raise an additional $50 million in funds to
cover its reserve requirement over the next three days. Federal funds are trading
today at 5.90 percent, and the bank’s economist has forecast a federal funds
rate of 6.15 percent tomorrow and 6.20 percent the next day. Negotiable CDs
in minimum maturities of seven days have been trading this morning at 5.85
percent, with a forecast of 5.90 percent tomorrow and 5.98 percent the next day.
The FDIC charges 30 cents per $100 for insurance coverage. Calculate the lowest-cost source of funding for Glenwood National Bank and the next cheapest source for borrowing over the next three days (today,
tomorrow, and the next day). What are the relative advantages and disadvantages
of each of these funding sources?