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Determine whether the account is profitable for the bank

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Reference no: EM13884520

The typical low balance customer at your bank with an average monthly demand deposit balance under $ 175 exhibits the following monthly activity: 35 withdrawals (11 electronic), two transit checks deposited, one transit check cashed, two deposits (one electronic), and one on us check cashed per month. Assume there is one account maintenance for an account in which checks are not returned and that net indirect expenses apply.

a. Use the unit cost data to estimate the average monthly expense for the bank to service this account.

b. Suppose the bank can earn an average 6.5 percent annually on investable deposits (ledger balances minus float minus required reserves). The typical customer keeps an average monthly balance net of float equal to $ 116 in the account and pays a $ 3.25 monthly service charge. The bank must hold 10 percent required reserves against the average balance and thus can invest 90 percent of the balance. Determine whether the account is profitable for the bank.

Reference no: EM13884520

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