A NOW account requires a minimum monthly balance of $500 if annual interest of 5 percent is to be earned monthly on its deposits.An account holder has maintained an average balance of $300 for the first nine months of the year and $800 for the last three months of the year.She has written an average of 20 checks a month and is not charged for these services.However, it costs the bank $0.02 to process each check. What is the average return (both explicit and implicit) earned by the account holder if the bank pays interest on only the amounts in excess of the required minimum of $200?
A)2.01 percent.
B)2.65 percent.
C)3.78 percent.
D)5.35 percent.
E)6.13 percent.

Question

Quizplus · Accepted Answer

The account holder earns interest only on the amount exceeding the $200 minimum. For the first nine months, the excess is $100 ($300 - $200), and for the last three months, the excess is $600 ($800 - $200). The interest earned is calculated monthly at 5% annually, which is approximately 0.4167% per month. The implicit return is the cost saved from not being charged for check processing, which is $0.02 per check for 20 checks per month. The average return combines both the explicit interest earned and the implicit savings from check processing.

A NOW Account Requires a Minimum Monthly Balance of $500