How does the Marginal Cost of Funds Curve compare to the Average Cost of Funds Curve for long-term assets?

The Marginal Cost of Funds Curve reflects the cost associated with obtaining one additional unit of funding for investment in long-term assets. In contrast, the Average Cost of Funds Curve provides an average cost of funds across all units of funding used, which would include both long-term and short-term sources of funding.

When analyzing long-term assets, it is typically observed that the Marginal Cost of Funds is greater than the Average Cost of Funds. This situation arises because, as institutions attempt to secure additional funding, they may need to access more expensive sources or face higher costs due to liquidity constraints or market conditions. As such, the additional funding required for long-term investments often comes at a higher price than what has been averaged across existing funding sources.

This discrepancy leads to the understanding that the Marginal Cost of Funds Curve will generally be positioned above the Average Cost of Funds Curve when considering the financing of long-term assets. This relationship is critical for financial institutions in decision-making processes related to funding strategies and investment appraisals.