Question

What would be the net annual cost of the following checking accounts? (a) Monthly fee, $4.20; processing fee, $0.20 cents per check; checks written, an average of 20 a month. (Do not round intermediate calculations. Input the answer as a positive value. Round your answer to 2 decimal places.) (b) Interest earnings of 5 percent with a $500 minimum balance; average monthly balance, $800; 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.)

Answer 1

a.

Monthly Fees = $4.20

Processing Fee $0.20 cents per checks (It may be either 20 cents per check or 0.20 cents per check, it is assumed that it is 20 cents per check)

No. of checks per months = 20 (Average)

Fee per Month = (No. of Checks x Processing Fee per check) + Monthly Fee

                        = (20 x 0.20) + $4.20

                        = $8.20

No. of Months = 12

Total Annual Cost = 12 x 8.20 = $98.40

b.

Monthly service charge if Balance fall below minimum balance = $16

No. of times balance fall below minimum balance = 3

Service Charge = Service charge Rate x no. of times = $16 x 3 = $48

Interest Rate = 5% p.a.

Average monthly balance = $800

Interest will not be earned in the months when balance falls below minimum balance of $500, which occurs 3 times in the year. So, interest will be earned for 9 months.

Interest income = Average monthly balance x interest rate x no. of months / 12

                          = $800 x 5% x 9/12

                          = $30

Net Annual Cost = Service Charge - Interest Income

                           = $48 - $30

                           = $18