Case 1: A Lobbyist Considers Her Checking Account Options

Jane Sheharky, a lobbyist for the textile industry living in Springfield, Virginia, has maintained a checking account at a commercial bank for three years. The bank requires a minimum balance of $100 to avoid an account charge, and Jane has always maintained this balance. Recently, she heard that a nearby savings and loan association is offering NOW accounts paying 3 percent interest on the average daily balance of the account. This institution requires a minimum balance of only $300, but a forfeiture of monthly interest occurs if the account falls below this minimum. She is seriously thinking about moving her money to the NOW account.

1. What is the main reason Jane should move her checking account?


2. What should Jane know about the differences among NOW accounts offered at various financial institutions?


3. If Jane maintained an average balance of $350 in a NOW checking account earning 3 percent, how much interest would she have earned on her money after one year? (Hint: Use Appendix A.1 or the calculator to calculate your answers. Do not forget to subtract Jane's initial lump sum from the derived answer.)


4. How much more would Jane have earned in one year if she decided to invest in a money market mutual fund paying 1.2 percent interest instead of the NOW account? (Hint: Use Appendix A.1 or the calculator , and make some subtractions.)


   

Go to another case in this chapter Case 1 Case 2