Marginal Cost Of Funds

AAA

DEFINITION of 'Marginal Cost Of Funds'

The incremental cost of borrowing more money to fund additional asset purchases or investments. In its simplest calculation, the marginal cost of funds is simply the interest rate on the new loan balance. Marginal cost of funds is often confused with the average cost of funds, which would be calculated by computing a weighted-average of all the combined loans' interest rates.

INVESTOPEDIA EXPLAINS 'Marginal Cost Of Funds'

While many investors only think of the marginal cost of funds in terms of money borrowed from someone else, it's also important to think of it in terms of money borrowed from oneself or a company's own assets. In this instance, the marginal cost of funds is the opportunity cost of not investing existing funds elsewhere and receiving interest on it. For example, if a company uses $1,000,000 of its own cash to build a new factory, the marginal cost of funds would be the rate of interest it could have earned if it had invested that money instead of spending it on construction.

RELATED TERMS
  1. Marginal Analysis

    An examination of the additional benefits of an activity compared ...
  2. Principal

    1. The amount borrowed or the amount still owed on a loan, separate ...
  3. Loan

    The act of giving money, property or other material goods to ...
  4. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  5. Loan Modification

    A modification to an existing loan made by a lender in response ...
  6. Unlevered Cost Of Capital

    An evaluation that uses either a hypothetical or actual debt-free ...
RELATED FAQS
  1. How are contingent liabilities reflected on a balance sheet

    Contingent liabilities need to pass two thresholds before they can be reported in the financial statements. First, it must ... Read Full Answer >>
  2. How do businesses determine if an asset may be impaired?

    In the United States, assets are considered impaired when net carrying value (book value) exceeds expected future cash flows. ... Read Full Answer >>
  3. How can I set up an accrual accounting system for a small business?

    First, determine whether accrual accounting makes the most sense practically and financially. If the small business is also ... Read Full Answer >>
  4. Why is work in progress (WIP) considered a current asset in accounting?

    Accountants consider work in progress (WIP) to be a current asset because it is a type of inventory asset. Accountants consider ... Read Full Answer >>
  5. What exactly does EBITDA margin tell investors about a company?

    EBITDA stands for earnings before interest, taxes, depreciation and amortization. EBITDA margins provide investors a snapshot ... Read Full Answer >>
  6. How is marginal analysis used in making a managerial decision?

    Marginal analysis plays a crucial role in managerial economics, the study and application of economic concepts, to managerial ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Accounting Rules Could Roil The Markets

    FAS 142 is an accounting rule that changes the way companies treat goodwill. Be aware of the impact it has on reported earnings to avoid making bad investment decisions.
  2. Insurance

    Ancient Accounting Systems

    Learn how accounting evolved to keep records of increasingly complex transactions and civilizations.
  3. Markets

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  4. Mutual Funds & ETFs

    Reinvesting Capital Gains In Leveraged Portfolios

    Don't get forced into action. Learn how to plan properly to avoid making rash decisions.
  5. Fundamental Analysis

    The One-Time Expense Warning

    These income statement red flags may not spell a company's downfall. Learn why here.
  6. Fundamental Analysis

    The Capital Asset Pricing Model: An Overview

    CAPM helps you determine what return you deserve for putting your money at risk.
  7. Markets

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  8. Economics

    What is a Management Buyout?

    A management buyout, or MBO, is a transaction where a company's management team purchases the assets and operations of the business they manage.
  9. Economics

    Understanding Green Field Investments

    A green field investment refers to a company, usually a large multi-national corporation, building a new facility in a foreign country.
  10. Economics

    Explaining Cash On Delivery

    Cash on delivery, also referred to as COD, is a method of shipping goods to buyers who do not have credit terms with the seller.

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center