Assume the average management cost per account per year is $200 and the average fees earned per account per year is $170.The average annual size of account is $1800.What is the average implicit interest rate (round to two decimals)?
A)-1.67%
B)1.67%
C)4.86%
D)15%

Question

Quizplus · Accepted Answer

To calculate the average implicit interest rate, we need to subtract the management cost from the fees earned to get the net earnings per account per year: $170 - $200 = -$30. Then, we divide the net earnings by the average account size and multiply by 100 to get the implied interest rate: ($30/$1800) x 100 = -1.67%. This is a negative number, indicating that the fees earned are not sufficient to cover the management costs, resulting in a loss. Choice B is the best answer as it reflects the negative implicit interest rate.

Assume the Average Management Cost Per Account Per Year Is