What is the annual opportunity cost of a checking account that requires a $260 minimum balance to avoid service charges? Assume an interest rate of 2.5 percent.
Is this bank in Union County?
To calculate the annual opportunity cost of a checking account, we need to consider the interest that could have been earned on the minimum balance if it was invested elsewhere. Here is how you can calculate it:
1. Determine the minimum balance required to avoid service charges - in this case, $260.
2. Calculate the potential interest earned on the minimum balance by multiplying it with the interest rate.
Interest earned = Minimum balance x Interest rate
= $260 x 0.025 (2.5 percent expressed as decimal)
= $6.50
3. Therefore, the annual opportunity cost is $6.50, which is the potential interest that could have been earned on the minimum balance if it was invested elsewhere instead of being held in the checking account.