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

Michelle's average balance for the year is calculated as follows: (3 months * $300 + 3 months * $800 + 6 months * $1,000) / 12 months = $775. With a 5% annual interest rate, her gross interest is $775 * 0.05 = $38.75. With the new service charge of 5 cents per check for 300 checks (25 checks/month * 12 months), the total service charge is $15. Therefore, her annual gross interest return is $38.75 + $15 = $53.75.

Michelle Has Maintained an Average Balance of $300 Per Month