A bank estimates that their average balance on demand deposit accounts is $2,000, net of float. Each account costs the bank $150 per year in processing costs. The bank collects an average of $7.50 per month on each account in service charges. Assume reserve requirements are 10%. What is the net cost of an average demand deposit?

Question

Quizplus · Accepted Answer

To calculate the net cost of an average demand deposit, we need to take into account the processing costs, service charges, and reserve requirements.

First, let's calculate the annual revenue from a demand deposit account:

Monthly service charges = $7.50 
Annual service charges = $7.50 x 12 = $90

Average balance = $2,000 
Reserve requirement = 10% 
Reserve balance = $2,000 x 0.1 = $200

Net balance = $2,000 - $200 = $1,800

Annual revenue = $90

Now, let's calculate the annual costs:

Processing costs = $150

Net cost = (Processing costs - Annual revenue) / Net balance 
Net cost = ($150 - $90) / $1,800 
Net cost = $60 / $1,800 
Net cost = 0.0333 or 3.3%

Therefore, the best choice is B: 3.3%.

A Bank Estimates That Their Average Balance on Demand Deposit