Your bank has two checking account options, one pays tax-free interest at a rate

Question

Your bank has two checking account options, one pays tax-free interest at a rate of 2% per annum and the other pays taxable interest at a rate of 3% per annum. You are currently in a 25% marginal tax bracket. If you converted the tax-free interest rate to the comparable taxable interest rate you would find that:

A. The comparable taxable rate is 2.667%, thus you would select the taxable account
B. The Comparable taxable rate is 2.35%, thus you would select the taxable account
C. The Comparable taxable rate is 3.53%, thus you would select the tax free account
D. You would always select the account bearing the highest interest rate.

Explanation / Answer

A UCF graduate writes 22 checks per month and pays $0.25 per check. 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)?

.25*22*12 = 66

.01*600 = 6

66-6 = $60   

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