An FI funds a $5 million residential mortgage in 2012 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 demand deposits have a reserve requirement of 10 percent, which means the FI must keep 10% of the deposits in reserves and can use the remaining 90% to fund the mortgage. 
Therefore, the demand deposit amount to be issued is$5,000,000/0.9=$5,555,556.
The deposit insurance premium is calculated as 23 basis points of the total deposit amount:
$5,555,556 * 0.0023 = $12,777.78 ≈ $12,778.
Hence, Choice B is correct.

An FI Funds a $5 Million Residential Mortgage in 2012