Michelle has maintained an average balance of $300 per month for the first three months of the year, $800 per month for the next three months, and $1,000 per month for the final six months of the year in a NOW account.It requires a minimum balance of $500 to be maintained if annual interest of 5 percent is to be earned.She writes an average of 25 checks per month but the account does not have a service charge for checks although it costs the bank 10 cents to process each check. Suppose the minimum balance to earn interest was lowered from $500 to $300 and she now pays a service charge of 5 cents per check.Note that it costs the bank 10 cents to process each check.What is her annual gross interest return?
A)$53.75.
B)$54.63.
C)$52.06.
D)$51.54.
E)$55.37.

Question

Quizplus · Accepted Answer

To calculate the gross interest return, we need to calculate the average balance maintained by Michelle throughout the year:

[(3 x 300) + (3 x 800) + (6 x 1,000)] / 12 = $675

Since the minimum balance required to earn interest has been lowered to $300, Michelle is eligible to earn interest for all 12 months of the year.

The interest earned at 5% per annum on an average balance of $675 for 12 months is:

(0.05 x 675) = $33.75

Next, we need to calculate the service charge for the checks. Michelle writes an average of 25 checks per month, i.e., a total of 300 checks in a year. The bank charges her 5 cents per check, which amounts to:

300 x 0.05 = $15

The net interest earned by Michelle after deducting the service charge is:

$33.75 - $15 = $18.75

Therefore, her annual gross interest return is:

$18.75 + $35 (10 cents cost to the bank per check x 25 checks per month x 12 months) = $53.75

Hence, the correct answer is (A).

Michelle Has Maintained an Average Balance of $300 Per Month