Question

For a $1,200 average collected balance demand deposit, the deposit insurance premiums are $0.80, and interest expense, administrative costs and service charges are $10.8, $45.20, and $23.50. What is RDD, keeping reserve requirement as 15%?

Answer 1

Formula to calculate the cost of deposits (RDD) -

RDD = [interest expense + administrative costs - service charges + deposit insurance premium] /

[Average collected balance * (1 - reserve requirement)]

Where,

Interest expense = $10.8

Administrative costs = $45.20

Service charges = $23.50

Deposit insurance premium = $0.80

Average collected balance = $1,200

Reserve requirement = 15%

Therefore,

RDD = [$10.8 +$45.20 -$23.50 +$0.80]/ [$1,200 * (1-15%)]

= $33.30 / $1,020

= 3.265%