Problem:
A NOW account requires a minimum 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.
1. What is the average return earned (both explicit and implicit) by the account holder over the full year?
a. 2.98 percent.
b. 3.48 percent.
c. 4.28 percent.
d. 4.79 percent.
e. 5.35 percent.
2. What is the average return earned (both explicit and implicit) by the account holder over the full year if the minimum balance is reduced to $200?
a. 2.01 percent.
b. 2.65 percent.
c. 3.78 percent.
d. 5.35 percent.
e. 6.13 percent.
3. 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.
4. The bank would like to limit the average return (both explicit and implicit) earned by the account holder to 5 percent per year. How much should it charge for processing each check to this Account holder assuming that it will pay annual interest of 5 percent and minimum balances of $200 are maintained?
a. 1 cent per check.
b. 2 cent per check.
c. 3 cent per check.
d. 4 cent per check.
e. 5 cent per check.
Additional Information:
This question is from Finance and it is about computation of average return earned for bank account which offers 5% interest rate for $500 of minimum balance.