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TeachMeFinance.com - explain cost of funds index cost of funds index -- a measure of how much interest a financial institution must pay for money it borrows from savers in the form of deposits, or from other lenders such as a Federal Home Loan Bank. The index, expressed as a percentage, is calculated by dividing the total amount of interest (or costs) paid or accrued on deposits, on District Bank advances and on other borrowed money, by the average amount of deposits and borrowed money on hand during a reporting period. A cost of funds index, such as the one published by the Office of Thrift Supervision, may be used by lending institutions as the basis for adjusting interest rates on adjustable rate mortgage loans. About the author Mark McCracken Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English". Copyright © 2005 by Mark McCracken, All Rights Reserved. TeachMeFinance.com is an informational website, and should not be used as a substitute for professional financial or legal advice. TeachMeFinance.com and its owner recommend consultation with a professional financial advisor prior to any investment or financial decision. Please read our disclaimer.