Question

What would be the net annual cost of the following checking accounts? (a) Monthly fee, $2.80; processing fee, $0.35 cents per check; checks written, an average of 23 a month. (Do not round intermediate calculations. Input the answer as a positive value. Round your answer to 2 decimal places.) Net annual cost (b) Interest earnings of 7 percent with a $500 minimum balance; average monthly balance, $700; monthly service charge of $16 for falling below the minimum balance, which occurs three times a year (no interest earned in these months). (Do not round intermediate calculations. Input the answer as a positive value. Round your answer to 2 decimal places.) Net annual cost

Answer 1

a) Monthly fees = $ 2.80

Processing fees = 0.35%

Average number of checks written per month = 23

Annual cost = 12×($2.80 +(0.35×23)

= $130.2

b) This account earn annual interest which needs to be subtracted from annual fees to calculate annual cost. However,interest is not earned during 3 month of the year when the balance falls below the minimum requirement. Instead, a monthly fees is charged during those months.So,the annual fees are found by multiplying 3 by the monthly fee.The annual interest can be calculated by applying the annual interest rate to the average monthly balance times 12-3=9 divided by 12,the portion of the year when interest is assessed.

Monthly fees = $ 16

Interest rate = 7%

Average monthly balance = $700

Annual cost = $15×3 - 700×7%×9/12

= 45 - 36.75

$ 8.25

The annual cost of this checking account is $ 8.25