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FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities

A bank considers raising USD 100 million through brokered CDs at 5.0% versus core retail time deposits at 4.6%. Brokered CDs carry a 0.25% annual placement fee to the broker. What is the all-in annual cost difference, in basis points, of brokered over retail funding?

The all-in cost difference is 65 basis points. Brokered CDs cost 5.00% plus a 0.25% placement fee, or 5.25%, compared with 4.60% for retail deposits. The 40 bp answer ignores the broker fee.

  1. A25 bps
  2. B40 bps
  3. C65 bpsCorrect
  4. D105 bps

Explanation

All-in brokered cost = 5.00% + 0.25% = 5.25%. Retail cost is 4.60%. Difference = 0.65% = 65 bps. Omitting the fee gives 40 bps; counting only the fee gives 25 bps.

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