Annual interest of 5% paid if balance exceeds 800, $7 monthly fee if account falls below minimum balance, average monthly balance $1,160, account falls below $800 during 5 months. What is the annual net cost of this checking account?
181.83
To calculate the annual net cost of the checking account, we need to consider both the interest earned and the fees incurred.
First, let's calculate the interest earned. The annual interest rate is 5%, and it is paid if the balance exceeds $800. The average monthly balance is given as $1,160, which means the account balance exceeds $800 every month. Therefore, for all 12 months, the account balance exceeds the threshold and earns interest.
To calculate the interest earned, we can use the formula: Interest = Principal × Interest Rate. In this case, the principal is the average monthly balance, and the interest rate is 5%. So the interest earned per month is (1,160 × 5%) / 100 = $58.
Next, we need to consider the fees incurred. A $7 monthly fee is charged if the account falls below the minimum balance of $800. It is mentioned that the account falls below $800 during 5 months, so for these months, the fee will be charged.
Now, let's calculate the total amount of fees paid by multiplying the monthly fee of $7 by the number of months when the account fell below $800. Therefore, the total fee is 7 × 5 = $35.
To calculate the annual net cost, we need to subtract the interest earned from the total fees paid. The net cost is (Total Fees - Interest Earned).
Net Cost = (35 - (58 × 12)).
Simplifying the calculation:
Net Cost = (35 - 696).
Net Cost = -$661.
Therefore, the annual net cost of this checking account is -$661, indicating that you would actually earn $661 instead of incurring a cost.