Question

The hollingsworth national bank maintains an average clearing balance of $7,000,000 with the federal reserve. the federal funds rate is currently 5.25%. what is the credit the bank will earn over the maintenance period that can be used to offset any fees charged by the federal reserve? show work and explain.

a. $367,500
b. $1,021
c. $14,292
d. $30,625

Answer 1

The Hollingsworth National Bank will earn a credit of $367,500 from the Federal Reserve over the maintenance period, calculated using the simple interest formula with the given federal funds rate and the bank's average clearing balance.

Step-by-step explanation:

The question is asking how much credit Hollingsworth National Bank will earn from the Federal Reserve due to maintaining an average clearing balance, given a certain federal funds interest rate. To calculate this, we can use the formula for simple interest, which is Interest = Principal × Rate × Time. In this case, the Principal is the average clearing balance of $7,000,000, the Rate is 5.25% (or 0.0525 when expressed as a decimal), and the Time is the duration of the maintenance period. Assuming a maintenance period of one year, the calculation would be:

Interest = $7,000,000 × 0.0525 × 1

Interest = $367,500

Therefore, over the maintenance period, Hollingsworth National Bank will earn a credit of $367,500, which can be used to offset any fees charged by the Federal Reserve. This corresponds to option A.