Consider the following situation A bank customer currently m

Consider the following situation: A bank customer currently maintains a checking account balance of $5000 so that she does not have to pay monthly maintenance charges or per-debit charges. She writes about 20 checks a month for a total of about $2100. If she kept only that amount in her checking account, she would have to pay a monthly maintenance fee of $20 plus a $.20/check charge.

Which of the following choices do you think this customer should make:

Solution

Option 1:If A maintains average monthly balance of 5000,

monthly maintenance charges = Nil

Option 2:Otherwise she keeps only balance sufficient for the cheques issued by her

she has to pay 20+ 20n where n is the number of cheques she writes per month.

She can keep 5000 in a SB account with 5% interest with privilege to transfer free 2 times a month. This means n-2 times she has to take care to keep balance in case she issues n cheques per month.

Option 3: Keep extra money in a money market yielding 8% interest.But here no of cheques she can use per month should be known.

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1) Exact number of cheques the customer writes per month on average to be known.

2) The amount available to her from other resouces to keep balance as and when required should be known

3) If checking account balance is as low then 20+20n < interest for 5000 per month.

Then only not keeping 5000 is profitable.

4) 5% on extra balance can be calculated for Sb balance knowing the cheques she issues and the no of times overdraft is done

5) Penalty for not keeping balance in the account to be taken into account

6) Money market would give 3% more than SB account, but the problem is restricting the no of cheques.

7) The cheques applicable for keeping in money market can be written by her for better income and no balance in checking account, with a readiness to keep balance when cheques are issued.