An FI operating in the United States funds a US$5 million residential mortgage in 2014 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 to FDIC of 23 basis points. What is the deposit insurance premium on the demand deposits issued to fund the mortgage?

Question

Quizplus · Accepted Answer

First, calculate the amount of demand deposits needed to fund the mortgage:

$5 million x 70% = $3.5 million

To account for the reserve requirement, the FI must hold:

$3.5 million / 0.9 = $3.89 million in demand deposits

To calculate the deposit insurance premium, we need to multiply the amount of demand deposits by the premium rate:

$3.89 million x 0.23% = $8,947

So the deposit insurance premium on the demand deposits issued to fund the mortgage is $8,947, which is closest to answer choice B, $12,778.

None of the other answer choices are close to this amount, so it must be the best choice.

An FI Operating in the United States Funds a US$5