Chapter 5: Financial Services: Savings Plans and Payment Accounts
What would be the net annual cost of the following checking accounts? (a) Monthly fee, $4.20; processing fee, $0.20 cents per check; checks written, an average of 20 a month. (b) Interest earnings of 5 percent with a $500 minimum balance; average monthly balance, $800; monthly service charge of $16 for falling below the minimum balance, which occurs three times a year (no interest earned in these months).
(a) Net annual cost = (Monthly fee × 12) + (Fee per check × Number of checks per month × 12) = ($4.20 × 12) + ($0.20 × 20 × 12) = $98.40 (b) Net annual cost = Service charges − Interest earnings = ($16 × 3) - (0.05 × $800 × 9 / 12) = $18.00
What would be the annual percentage yield for a savings account that earned $52.20 in interest on $900 over the past 365 days?
APY = 100 (Interest / Principal) = 100 ($52.20 / $900) = 5.80%
With a 28 percent marginal tax rate, would a tax-free yield of 8 percent or a taxable yield of 10.0 percent give you a better return on your savings?
After-tax yield = Pretax yield × (1 - Tax rate) = 10.00% × (1 - 0.28) = 7.20% The tax-free investment yields 8 percent which is preferable to the 7.2 percent after-tax yield on the taxable investment
A certificate of deposit will often result in a penalty for withdrawing funds before the maturity date. If the penalty involves two months of interest, what would be the amount for early withdrawal on a $63,000, 6 percent CD?
Annual interest = Annual interest rate × Investment = 0.06 × $63,000 = $3,780 Penalty = 2 months of interest = (2 / 12) × Annual interest = (2 / 12) × $3,780 = $630
What is the annual opportunity cost of a checking account that requires a $1,000 minimum balance to avoid service charges? Assume an interest rate of 2 percent.
Annual opportunity cost = Minimum balance × Interest rate = $1,000 × 0.02 = $20
A payday loan company charges 9.00 percent interest for a two-week period. What is the annual interest rate?
Annual percentage rate = Rate per period × Number of periods per year = 0.0900 × (52 weeks / 2 weeks) = 2.34, or 234.00%
Based on the following information, determine the true balance in your checking account. Balance in your checkbook=$357; Interest earned on the account=$3; Balance on bank statement=481; Total of outstanding checks=199; Service charge and other fees=16; Deposits in transit=62
Checking Account Balance =Current checkbook balance - Service charge + Interest earned = 357 - 16 + 3 = 344 Current bank statement balance + Deposits in transit - Outstanding checks =481 + 62 - 199 = 344
What would be the value of a savings account started with $1,700, earning 6 percent (compounded annually) after 5 years?
FV = $1,700 × 1.338 = $2,274.60
Brenda Young desires to have $16,500 eight years from now for her daughter's college fund. If she will earn 12 percent (compounded annually) on her money, what amount should she deposit now? Use the present value of a single amount calculation.
PV = $16,500 × 0.404 = $6,666
If a person has ATM fees each month of $15 for 10 years, what would be the total cost of those banking fees?
Total cost = Cost per month × 12 months per year × Number of years = $15 × 12 × 10 = $1,800
