Question: Banks and other lending affiliates within the holding company of Interstate National Banc are reporting heavy loan demand this week from companies in the southeastern United States that are planning a significant expansion of inventories and facilities before the beginning of the fall season. The holding company and its lead bank plan to raise $850 million in short-term funds this week, of which about $835 million will be used to meet these new loan requests. Fed funds are currently trading at 4.50 percent, negotiable CDs are trading in New York at 4.69 percent, and Eurodollar borrowings are available in London at all maturities under one year at 4.47 percent.

One-month maturities of directly placed commercial paper carry market rates of 4.65 percent, while the primary credit discount rate of the Federal Reserve Bank of Richmond is currently set at 5.50 percent-a source that Interstate has used in each of the past two weeks. Noninterest costs are estimated at 0.25 percent for Fed funds, discount window borrowings, and CDs; 0.35 percent for Eurodollar borrowings; and 0.50 percent for commercial paper. Calculate the effective cost rate of each of these sources of funds for Interstate and make a management decision on what sources to use. Be prepared to defend your decision.