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.

Question

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?

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.

Quizplus · Accepted Answer

The account holder earns interest on the excess balance over $200. 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. Additionally, the implicit return from free check processing is $0.40 per month (20 checks * $0.02). Calculating the total explicit and implicit returns and dividing by the average balance gives an average return of approximately 3.78%.

A NOW Account Requires a Minimum Monthly Balance of $500