A bank estimates that their average balance on demand deposit accounts is $2,500, net of float. Each account costs the bank $175 per year in processing costs. The bank collects an average of $5 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

First, let's calculate the annual revenue per account:
$5 x 12 months = $60 per year
Next, let's calculate the reserve requirement:
10% of $2,500 = $250
Now, let's calculate the net interest revenue:
$2,500 - $250 = $2,250
$2,250 x 0.02 (2% interest rate) = $45 per year
Finally, let's calculate the net cost:
$175 (processing costs) + $60 (service charges) - $45 (interest revenue) = $190
$190 / $2,500 = 0.076 or 7.6%
However, the question asks for the net cost, which is the percentage of total account balance, including reserve requirements. So we need to add the reserve requirement back in:
$190 / ($2,500 + $250) = 0.051 or 5.1%
Therefore, the best choice is C.

A Bank Estimates That Their Average Balance on Demand Deposit