1. What is Cost Of Funds (COF)?

Cost Of Funds (COF) is a financial metric that calculates the interest expense incurred by financial institutions on their interest-bearing liabilities. It represents the cost of acquiring funds to support lending and investment activities.

2. How Does the Calculator Work?

The calculator uses the COF formula:

Where:

• \( \text{Total Interest Expense} \) — Total interest paid on deposits and borrowings (USD)
• \( \text{Average Funds} \) — Average interest-bearing liabilities during the period (USD)

Explanation: The formula expresses the cost of funds as a percentage, showing how much it costs the institution to maintain its funding base.

3. Importance of COF Calculation

Details: COF is crucial for financial institutions to determine their net interest margin, set lending rates, assess funding efficiency, and make strategic decisions about funding sources.

4. Using the Calculator

Tips: Enter total interest expense and average funds in USD. Both values must be positive numbers. The result shows COF as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good COF ratio?
A: A lower COF is generally better, indicating cheaper funding. The ideal ratio depends on market conditions and the institution's business model.

Q2: How does COF differ from cost of capital?
A: COF specifically measures the cost of debt funding, while cost of capital includes both debt and equity financing costs.

Q3: What factors affect COF?
A: Market interest rates, deposit mix, funding structure, credit rating, and economic conditions all influence COF.

Q4: How often should COF be calculated?
A: Typically calculated quarterly or annually, but can be monitored more frequently for strategic decision-making.

Q5: Can COF be negative?
A: No, COF cannot be negative as both interest expense and average funds are positive values.