Interest earnings of 4 percent with a $600 minimum balance; average monthly balance, $900; monthly service charge of $16 for falling below the minimum balance, which occurs four times a year (no interest earned in these months). What is the net annual cost?
To find the net annual cost, we need to calculate the total amount of monthly service charges and subtract the interest earnings in the remaining months.
First, we need to determine the number of months where the minimum balance was not maintained (and interest was not earned). Since it occurs four times a year, we multiply 4 by 3 (number of months in a quarter) to get a total of 12 months.
Next, we calculate the total monthly service charge by multiplying the number of months without the minimum balance by the monthly service charge amount: 12 months × $16 = $192.
Now, let's calculate the interest earned in the remaining months. Since the average monthly balance is $900, and it earns an interest rate of 4 percent annually, we can find the monthly interest earnings as follows:
Interest earned per month = (Average monthly balance × Interest rate) / 12
= ($900 × 0.04) / 12
= $3.
To find the annual interest earnings, we multiply the monthly interest earnings by 12: $3 × 12 = $36.
Finally, to find the net annual cost, we subtract the annual interest earnings from the total monthly service charges: $192 - $36 = $156.
Therefore, the net annual cost of the account is $156.