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I am asked to comment on the Funds Transfer Pricing methodology used by our Treasury to assign a Cost of Funds to a Loan. This is the current methodology: Let us say there is a 2 year loan with an annual payment and each payment pays down half of the principal (+ some interest).

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The FTP is calculated by Treasury as: `

SUMPRODUCT(Year,% of Principal,Bank's Borrowing Cost)/SUMPRODUCT(Year,Bank's Borrowing Cost)

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Is this correct?

If it were me, I would just calculate the Macaulay Duration of the Loan and lookup the borrowing cost corresponding to that duration.

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  • $\begingroup$ Is the result of the ratio of the sumproduct supposed to be FTP? $\endgroup$
    – Magic is in the chain
    Jul 1, 2020 at 11:58
  • $\begingroup$ Correct, the 'weighted average' FTP, as they call it. $\endgroup$
    – Victor123
    Jul 2, 2020 at 13:20
  • $\begingroup$ Could you plz check what does the formula produce when applied to the given data? $\endgroup$
    – Magic is in the chain
    Jul 2, 2020 at 16:29

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