Question

A UCF graduate has 3 bank overdrafts per year, and the bank charges $35 per overdraft. The bank pays the graduate 1% interest per annum, and he/she maintains an average monthly balance of $600. What is the graduate's net annual cost of maintaining the checking account after giving effect to the interest earned (ignore taxes)?

Answer 1

To calculate the graduate's net annual cost of maintaining the checking account, we need to consider the bank overdrafts, the bank interest, and the average monthly balance. The total cost of overdrafts is $105, and the annual interest earned is $6. Therefore, the net annual cost is $99.

Step-by-step explanation:

To calculate the graduate's net annual cost of maintaining the checking account, we need to consider the bank overdrafts, the bank interest, and the average monthly balance.

1. First, we calculate the total cost of bank overdrafts per year. Since the graduate has 3 overdrafts per year and each overdraft costs $35, the total cost of overdrafts is 3 * $35 = $105.
2. Next, we calculate the interest earned on the average monthly balance. The interest rate is given as 1% per annum, so the monthly interest rate is 1% / 12 = 0.0833%. The average monthly balance is $600, so the interest earned per month is $600 * 0.0833% = $0.50. Multiply this by 12 to get the annual interest earned: $0.50 * 12 = $6.
3. Finally, to calculate the net annual cost, subtract the interest earned from the total cost of overdrafts: $105 - $6 = $99.

Therefore, the graduate's net annual cost of maintaining the checking account is $99.