An FI funds a $5 million residential mortgage in 2017 by allocating capital and by issuing demand deposits.The mortgage represents a loan-to-value of 70 percent.The demand deposits have a reserve requirement of 10 percent and a deposit insurance premium of 23 basis points. What is the deposit insurance premium on the demand deposits issued to fund the mortgage?

Question

Quizplus · Accepted Answer

The amount of demand deposits needed to fund the mortgage is $5 million x 70% = $3.5 million.

The required reserve amount is 10% x $3.5 million = $350,000.

The deposit insurance premium is calculated as 23 basis points x $3.5 million = $8,050.

However, since the required reserve amount is taken out of the demand deposits, only ($3.5 million - $350,000) = $3,150,000 is subject to the deposit insurance premium.

Therefore, the deposit insurance premium on the demand deposits issued to fund the mortgage is $8,050 / $3,150,000 x $5 million = $12,777.78, rounded to $12,778.

The answer is B.

An FI Funds a $5 Million Residential Mortgage in 2017